The situation in Washington is coming to a head. In January, the federal government's debt reached the legal limit. Since then, the government's bank balances have been melting down in order to be able to continue making ongoing payments. "Day X" is approaching threateningly. This is the date on which the United States, with its more than 30 trillion dollars of national debt, will become insolvent even after all extraordinary measures have been exhausted. That could happen as early as June.

The fact that the debt ceiling has to be raised regularly by Congress is actually a well-rehearsed routine. Most of the time, this is done completely silently. But not this time. The government's request to raise the debt ceiling was rejected by the leader of the new, razor-thin Republican majority, Kevin McCarthy. Instead, he has had the House of Representatives pass a bill that links the increase in the debt ceiling to massive spending cuts. Among other things, there are calls to scrap a significant part of President Biden's agenda without replacement. This bill will have no chance of success in the Senate with its Democratic majority.

On the other hand, the Democrats cannot hope to get a handful of moderate Republicans in the House of Representatives to agree to a Democratic bill to increase the debt ceiling. That would take the cow off the ice. But it's not that easy either: As Speaker of the House, McCarthy has control over what comes to the vote in the first place. And in January, he was only elected to office on the 15th attempt, when he promised radical forces among the Republicans that he would not give in one iota on the debt brake.

Political "rabbit foot race"

The fronts are hardened. Whoever moves first loses. The scenery is reminiscent of the James Dean classic "Because they don't know what they're doing": Two young men race towards a cliff with stolen cars. Whoever jumps out of the vehicle first loses, is the coward. If you don't know the movie, it doesn't end well. Today, the opposing camps are facing each other in a political "rabbit's foot race". Here, too, it could end badly.

In a similar episode in the summer of 2011, a compromise was only found when the default was already within reach. But back then, the mistrust or even hatred between the parties was not nearly as great as it is today. And no Donald Trump was breathing down the neck of then-Speaker John Boehner. Moreover, McCarthy has no significant political legroom due to his majority of just five votes. There is no sign of a political compromise. The probability of a politically indebted default in the summer is higher than ever.

Rating agencies are an important capital market institution for forecasting defaults. Over the course of the 2011 episode, the world's largest rating agency, S&P, gave the thumbs down and downgraded the US for the first very first – and so far only – time. The main reason was the dysfunctional political process. Months earlier, the downgrade risk was clearly communicated by a negative outlook,

No downgrade in sight

And today, when the default risk is greater than ever? "No connection under this number!" could be the answer if you call the rating agencies about the risk of default. Virtually all major agencies have a "stable outlook" on the U.S. rating, claiming that they are not even considering a downgrade as a possibility. And with the aforementioned exception of S&P, their ratings are even at "AAA", the absolute peak of creditworthiness. "Only Europe's largest rating agency, Scope, is considering a downgrade of the US credit rating ('AA'), while the major American agencies are all keeping their feet still."

Speaking of which, according to the methodology used, S&P's US rating would actually have to be one notch lower due to the continuously deteriorating fiscal situation since 2011. In order to prevent another downgrade, S&P made a truly remarkable decision in March 2021: the rating of the quality of the political process was raised back to the best possible level. A few weeks after the storming of the Capitol! The methodology simply no longer allowed for any other way to prevent a downgrade! Fitch Ratings even raised its outlook to stable from negative last summer.

The Wrath of Washington

All of this suggests that the agencies do not want to be in the crosshairs of politicians in the US mess. The fact that S&P had to deal with a billion-dollar lawsuit from the US Department of Justice after the downgrade in 2011 has certainly not been forgotten, even if the accusation was ostensibly different.

The agencies may think that, in the end, it is no less embarrassing if the US defaults on the basis of an "AA" rating than on the basis of the top rating of "AAA". But a proactive downgrade might get caught between hardened political fronts and incur the wrath of Washington. Turning a blind eye to the agencies is tantamount to abdicating. The agencies' refusal to work suggests to investors that they do not need to worry about a US default. That could take revenge. Not only for investors, but also for the credibility of the rating industry itself.

The author is Chief Economist at LBBW.