Another U.S. Credit Rating Downgrade Expected

By:  Raven Clabough
10/25/2011
       
Another U.S. Credit Rating Downgrade Expected

Back in August, when Standard & Poor's downgraded the U.S. credit rating for the first time in history, from AAA to AA+, the Obama administration was disgruntled and fearful of how such a move would impact economic growth. Once the initial shock of the maneuver passed, however, Washington returned to its business-as-usual mentality. Now, however, it seems that this period will be short-lived, as another downgrade is expected.

According to Bank of America/Merrill Lynch’s Ethan Harris:

We expect a moderate slowdown in the beginning of next year, as two small policy shocks — another debt downgrade and fiscal tightening — hit the economy. 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. Since the fall-back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts.

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. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes.

Back in August, when Standard & Poor's downgraded the U.S. credit rating for the first time in history, from AAA to AA+, the Obama administration was disgruntled and fearful of how such a move would impact economic growth. Once the initial shock of the maneuver passed, however, Washington returned to its business-as-usual mentality. Now, however, it seems that this period will be short-lived, as another downgrade is expected.

According to Bank of America/Merrill Lynch’s Ethan Harris:

We expect a moderate slowdown in the beginning of next year, as two small policy shocks — another debt downgrade and fiscal tightening — hit the economy. 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. Since the fall-back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts.

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. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes.

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Graphic: Credit rating of governments around the world by Standard & Poor's

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