By Davide Barbuscia
NEW YORK (Reuters) - A unified government under President-elect Donald Trump is unlikely to lead to a quick resolution of the U.S. debt-ceiling debate given a narrow Republican House majority and continued disagreements within the party on spending policies, said ratings agency Fitch.
As part of a 2023 budget agreement, Congress temporarily lifted the debt ceiling until Jan. 1, 2025. While the U.S. Treasury can continue covering its obligations for several more months, Congress must revisit the issue this year to avoid a debt default.
Fitch, which downgraded the U.S. government credit profile in 2023 after a debt-ceiling crisis, said on Tuesday it was skeptical that a debt-limit suspension or increase, as well as other key fiscal policy decisions expected this year, will be implemented quickly.
"The U.S. faces significant fiscal policy challenges in 2025 ... We believe it is unlikely that these will be resolved expeditiously because of long-standing weaknesses in the federal government’s budgetary process and a narrow Republican House majority," it said in a statement.
Hopes that one-party control of government could make it easier to agree on raising the debt ceiling were dented last month when Congress passed spending legislation in a down-to-the-wire vote that averted a destabilizing government shutdown. Several Republicans rejected Trump's demand to use the bill to lift the nation's debt ceiling.
The last-minute resolution was consistent with the ratings agency's expectations that Congress would rely on temporary funding measures, and demonstrated "the potential obstacles to securing agreements on fiscal measures, both within Congress and between Congress and the President," Fitch said.
The cost of insuring exposure to U.S. government debt has started to climb this week, with spreads on U.S. six-month and one-year credit default swaps - market-based gauges of the risk of a default - widening by three and four basis points, respectively, compared to last week, S&P Global Market Intelligence data showed on Tuesday.
The 2023 debt-ceiling showdown spurred a selloff in stocks and bonds, pushed the U.S. to the brink of default and hurt the country's credit rating.
Fitch said it expects U.S. policymakers to eventually reach an agreement on the debt ceiling as well as on other key fiscal policy items, such as the extension of 2017 tax cuts set to expire this year.
But a still-challenging political environment means decisions are likely to be reached on an issue-by-issue basis, it said, "underscoring the U.S.’ deterioration in governance on fiscal matters over recent years."