Morgan Stanley with the note.
Reports suggesting that the debt ceiling drama is inching toward a compromise agreement are good news indeed. The details emerging are still tentative,a final agreement is not yet in hand and,given the fraught state of politics in Washington, DC, legislative passage is not assured. That said, with the ‘X-date’ (when the federal government runs out of cash) fast approaching, tangible progress toward a resolution to avoid a US sovereign default should bring a sigh of relief on the outlook for the economy and markets.
However, it is important to think about the risks that follow once the debt ceiling impasse is resolved. On May 23,Fitch Ratings placed the AAA rating of US sovereign debt on negative watch,noting that “the brinkmanship over the debt ceiling negotiations, the failure of the US authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden” signal downside risks to US creditworthiness. Recall that back in 2011, S&P downgraded the US rating to AA+ after the resolution of a similarly wrenching debt ceiling drama.
