U.S. credit rating may be downgraded, even if debt ceiling raised

Many economists are speculating that the credit rating for the U.S. could be downgraded, even if an agreement is reached to raise the debt ceiling before next week’s deadline. Some also say that a downgrade would be less catastrophic than feared.

Debt debate

The nation has until Aug. 2 to raise the current $14.3 trillion debt spending limit. President Obama and Congressional Republicans continue to debate on long-term spending cuts. House Republicans continue refusing approval of the ceiling hike without spending cuts.

Reporting agencies

There are three major credit reporting agencies that grade the nation’s creditworthiness. They are Moody’s, Standard & Poor’s (S&P) and Fitch’s. At least one of the agencies has hinted that the country may face a downgrade, even if the debt ceiling is raised.

S&P warns of 50/50 chance

S&P warned earlier this month that if the U.S. could not find a “credible solution to the rising U.S. government debt burden” that it faced a 50 percent chance of being downgraded to AA in 90 days.

Even if the debt ceiling is raised, S&P maintains that the rating could drop unless a $4 trillion spending cut package is agreed upon. At this time, the spending cuts under discussion in Washington equal about half of that.

Some say inevitable

Some believe the downgrade is inevitable. Former Republican Rep. Pete Hoekstra, 55, speaking in Bloomfield Hills, Mich., said Tuesday:

“We are going to see our credit rating downgraded. I think that’s almost a foregone conclusion. I don’t think the ratings organizations are going to see the type of commitment to restrain spending that they’re looking for.”

Terry Belton, head of fixed-income strategy at JPMorgan Chase, said that a drop from AAA to AA will mean permanently higher borrowing costs for the nation. As  government lending rates rise, so will the rates on student loans, mortgages and other types of loans. Belton said the downgrade would eventually lead to an extra $100 billion being paid annually on interest.

Economists say that higher interest rates would lead to state governments also receiving downgrades. Business confidence would decline, leading to higher or prolonged unemployment rates.

Not the end of the world, some say

However, other experts are saying that a downgrade may not be as dire as some fear. Fitch’s says that the U.S. Treasurys — the low-risk, low-return securities that the U.S. sells to pay its bills — will continue to hold their unique appeal for investors:

“U.S. Treasuries would likely retain their standing as the benchmark security that anchors global fixed-income markets, given their unparalleled liquidity, unique role in the financial system, strong credit profile, and lack of a viable alternative.”

Fitch’s did, however, warn that U.S. Treasurys “could lose favor in the very long run if the U.S. doesn’t eventually get its fiscal house in order, but that’s not an immediate worry.”

The third reporting agency, Moody’s, maintains that the U.S. will retain its AAA rating if the debt ceiling is raised.

Sources

Wall Street Journal
Huffington Post
Daily Tribune