Downgrade Doldrums: US Credit Rating May Drop Even if Debt Deal is Reached

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As Democrats and Republicans continue to trade barbs in the senate over an agreeable debt deal, numerous market analysts and investors have now agreed that the US faces the increasing possibility of losing its AAA rating from at least one of the three major credit rating agencies – namely Standard & Poor’s, Moody’s, and Fitch – even if a compromise can be reached by the August 2nd deadline.

According to a Reuters poll of 53 economists, more than half of those surveyed believed that a US credit rating downgrade was inevitable due to the country’s current massive debt situation as well as the uncertainty caused by the debt ceiling battle.

"We believe that Congress will act with an 11th hour deal to raise the debt ceiling. However, the risk of that deal failing increases with each passing day," said Guy LeBas, director at Janney Capital Markets.

"I would say that the chance of a U.S. ratings downgrade is now more likely than not."

Earlier this month, Standard & Poor’s announced that there was a 50 percent chance that it would downgrade the US’s credit rating status within the 90 days unless a US$4 trillion agreement in budget cuts could be reached. Presently, the figures being discussed have been closer to the US$1 trillion mark.

“We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future,” said a S&P representative to Bloomberg.

Moody’s is likely to follow suit after placing the US in its review list for the first time since 1996. The credit rating agency, which has rated the US at its highest grade since 1917, warned that unless the debt threshold is raised in time, the US could also face a ratings downgrade from its company.

Although the effects on the economy of a ratings downgrade would not be as catastrophic as that of a outright debt default, President Barack Obama stressed on Monday in his live television broadcast that such an event would be unprecedented in US history.

“For the first time in history, our country's AAA credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet.”

Former IMF chief economist Michael Mussa also pointed out that while “it’s very open to question how much a ratings downgrade would make…we can be sure it wouldn’t be a positive development."