Second US Credit Ratings Downgrade Imminent, Warns BofA Merrill

By: EW News Desk Team   Date: 24 October 2011

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24 October 2011

 The United States will lose its top AAA credit rating status from another major credit rating agency by the end of this year if Congress fails to agree upon a credible long-term plan that addresses the US deficit problem, forecasted Bank of America Merrill Lynch economists in a research note published on Friday.

In August this year, Standard & Poor’s became the first among the big three credit rating agencies – that includes Moody’s and Fitch – to downgrade the US economy as concerns grew over the government’s budget deficit and the nation’s rising debt burden. If the economists from Bank of America Merrill Lynch are to be believed, either Moody’s or Fitch will follow in S&P’s example, especially if the bipartisan congressional committee formed to address the deficit – known as the "super committee" – cannot reach a deal to reduce the U.S. deficit by at least $1.2 trillion by November 23.

"The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan" to cut the deficit, wrote Merrill's North American economist Ethan Harris in his report as cited by Reuters. "Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes.”

Harris added that the likelihood of the “super committee” reaching a suitable conclusion was extremely low, compounding the chances of another ratings downgrade.

“The ‘not-so-super’ deficit commission is very unlikely to come up with a credible deficit-reduction plan…The committee is more divided than the overall Congress,” he wrote.

While the prospects of a second downgrade appears to be highly likely in the view of Bank of America Merrill Lynch economists, exactly which rating agency will make the dreaded move is still unknown.

Moody's, which already has a negative outlook on the United States's AAA rating, told Reuters that several other factors, including the 2012 presidential elections and the expiration of the Bush-era tax cuts late in 2012, would play a role in its eventual decision.

"It's not that we're waiting just for this committee to decide on the rating," said Moody’s lead US analyst Steven Hess, adding that while a failure by the “super-committee” to reach an agreement "would be negative information…it is not decisive in our view about the rating."

Fitch, on the other hand, has stated that it was more likely that it would revise its outlook on the US’s AAA rating from stable to negative before it would consider downgrading the ratings.

However, representatives from both rating agencies were also quick to point out that an early move on US ratings was not impossible, though at the moment the economy “is certainly not super positive but not a disaster either.”


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