Credit Ratings Agencies Warn of Possible US Downgrade in 2013
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All three major credit rating agencies have warned that the United States could lose its stellar AAA-rating next year if it fails to avoid the so-called fiscal cliff and urged politicians to act in the interest of the economy instead of engaging in excessive political posturing.
All three major credit rating agencies have warned that the United States could lose its stellar AAA-rating next year if it fails to avoid the so-called fiscal cliff and urged politicians to act in the interest of the economy instead of engaging in excessive political posturing.
Credit ratings agencies say the US is likely to lose its pristine AAA rating in the absence of a sustainable and coherent medium-term vision for the US federal budget, which has seen deficit rise by $1 trillion in each of the last four years, and could have a detrimental effect on the country’s borrowing costs as well as shift investment away from the world’s largest economy.
“If no budget deal is reached in the early part of next year and the debt trajectory just continues to rise … then we’d be looking at a downgrade of a notch to Aa1,” said Bart Oosterveld, managing director at Moody’s sovereign risk group.
Moody’s, however, added it will wait to see the economic impact should the nation experience a fiscal shock.
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Last month, Bill Gross, manager of PIMCO’s $278 billion Total Return Fund, said that the US will no longer be the first destination of global capital in search of safe havens unless fiscal spending and debt growth slows, saying the nation “frequently pleasures itself with budgetary crystal meth.”
“Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilise federal debt over the medium term, consistent with the US retaining its AAA status,” Fitch said last Wednesday.
Chairman of Standard & Poor’s, John Chambers, said:
[quote] The rating is in the hands of policymakers. [/quote]
The expiration of some $600 billion worth of Bush-era tax breaks and automatic spending cuts are set to kick in on the January 1. Most economists believe falling over the fiscal cliff will risk tipping the already fragile US economy back into recession.
However, some analysts believe that bond markets would largely ignore a US downgrade. Troy Willis, vice president at OppenheimerFunds, said:
[quote] It’s nonsense. Tell me what’s a better credit out there. [/quote]
“There’s a low probability that we’ll have this fiscal cliff,” Willis added, and said raising taxes and cutting spending would be “good for bonds.”
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