If Congress fails to agree on a long-term plan to tame the nations debt, then the United States is due for another credit downgrade before this year's end. Bank of America predicted that either Moody's or Fitch will do the downgrade, Standard & Poor's cut the credit rating back in August.
Oct 24, 2011 8:40am
By Bill McGuire
The United States is in for another credit downgrade by year’s end if Congress fails to agree on a long-term plan to tame the nation’s $14.8 trillion debt, Merrill Lynch warned.
In a research note, the Bank of America unit predicts that either Moody’s or Fitch will move to downgrade the U.S. AAA rating. Standard & Poor’s cut the nation’s bond rating in August, causing the stock and bond markets to swoon, after months of bickering by Congress on how to best reduce spending and cut the deficit. The United States spends about 40 percent more annually than it collects in taxes.
“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, Merrill’s North American economist, Ethan Harris, wrote in the Friday report. ”Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes.”
Instead of agreeing on spending cuts or new taxes, Congress and the president appointed a bipartisan ”super committee” to reach a deal to reduce the U.S. deficit by at least $1.2 trillion by Nov. 23. If there’s no deal, automatic across-the-board cuts mostly in discretionary spending would occur. Congress would be free to stop any or all of those reductions, if it chooses and the president agrees.
Moody’s Investors Service hasn’t said what it will do if there’s no deal, but it has placed U.S. credit under review for a possible downgrade.
“It’s not that we’re waiting just for this committee to decide on the rating,” Steven Hess, Moody’s lead analyst for the United States, told Reuters last week. Failure to come up with a deal “would be negative information but it is not decisive in our view about the rating.”
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