Although DBRS said that it expects Congress to raise the debt ceiling before the Treasury runs out of available resources, it warned there is a risk of "Congressional inaction as the X-date approaches. DBRS would consider any missed payment of interest or principal as a default." Should that happen, the relevant U.S. issuer ratings would be downgraded to "selective default."
The U.S. reached its $31.4 trillion debt limit or ceiling on Jan. 19. An agreement is yet to be reached on increasing or suspending the cap on the money the U.S. government can borrow to pay obligations, and the so-called X-date — when the government runs out of money — is looming.
A key ratings consideration is that the U.S. federal government will not be able to pay all of its obligations if Congress does not increase or suspend the debt ceiling in a timely manner, a ratings note said.
DBRS said while the precise timing of the X-date is unclear, it cited Treasury Secretary Janet Yellen's reiterated warning that it could be as soon as June 1.
"Judging from the latest data on daily net inflows into the Treasury General Account, we believe it is reasonable to assume the X-date could arrive within weeks if not days," the ratings note said.
DBRS also warned on the implications of a failure to reach an agreement. "In addition, failure to lift the ceiling in a timely manner could indicate that political polarization is affecting the quality and predictability of U.S. policymaking," the note added. The prospect of "repeated debt ceiling standoffs in a polarized political environment," even if Congress increases the debt ceiling prior to the X-date, may also lead DBRS to judge that U.S. credit risk has increased to a level that is inconsistent with a AAA rating, it said.
However, DBRS also highlighted "exceptional strengths" of the U.S. that support its credit profile, such as its accounting for one-quarter of global output, a highly resilient economy to shocks, a flexible labor market and global leadership position in terms of research and innovation.
"While a late debt payment could erode the reputation of the dollar as the world's primary reserve currency and U.S. government bonds as global safe-haven assets, the fundamental credit strengths of the U.S. would likely continue to support the ratings," the note said.
DBRS's review followed a Fitch Ratings note late Wednesday stating that it had placed the U.S.'s AAA status on "rating watch negative" due to "debt ceiling brinkmanship."
"The rating watch negative reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching" X-date. Fitch also said it expects a resolution to be reached before the X-date, but added that risks have risen that it will not be raised or suspended before that point and, consequently, the government may begin to miss payments.
"The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness," Fitch said.
However, the ratings agency said it would expect the U.S. country ceiling to remain at AAA, even in the scenario of a debt default. "The U.S. dollar is the preeminent world's reserve currency, and we view the risk of exchange and capital controls as de minimis," Fitch's note said.