Another US Credit Downgrade Looming?

Remember back in August 2011 when Standard & Poor’s downgraded the US credit rating from Aaa to Aa+? Yeah, me too. S&P attributed it to:

“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”

And guess what? The situation hasn’t improved. Congress still can’t work together to get anything done, sequestration is looming, and Fitch Ratings is warning that they might follow suit and downgrade our credit rating if lawmakers don’t make credible progress on a long-term deficit-reduction strategy.

According to Fitch:

“Further delay in reaching agreement on a credible medium-term deficit reduction plan would imply public debt reaching levels inconsistent with the U.S. retaining its ‘AAA’ status despite its exceptional credit strengths.”

They went on to say that a credible plan could include a mix of tax increases and spending reductions but that it’s up to US lawmakers to decide on the specifics set a timeline for deficit reduction. They also noted that, due to our aging population, entitlement reform will be needed to keep spending in check.

As before, these sorts of hits to our credit rating could reduce confidence in Treasury securities. If investors start to question the “risk-free” nature of Treasury bonds, borrowing prices will rise. Those higher borrowing costs will increase the amount we spend on servicing our debt which means we’ll have to cut even deeper (and/or raise taxes even further) to get the deficit under control.

And while the idea of higher rates might be sound good to income investors, higher rates will devalue existing bonds. Fun, fun, fun.

So… What do you think will happen? Will we escape 2013 without another credit downgrade? Remember, even if Congress deals with the sequestration issue there will be at least one more debt ceiling showdown before the year is out…

4 Responses to “Another US Credit Downgrade Looming?”

  1. Anonymous

    Who cares what the ratings agencies think? Investors certainly didn’t care: in fact, yields fell even further when the downgrade occurred. The mortgage crisis told most investors what the ratings were actually worth.

  2. Anonymous

    I’m not the type who really likes to try and predict these things but there’s no doubt it’s a possibility and the uncertainty in the markets in increasing.

    People are worried about Italy, the FOMC is causing waves, and on and on. The volatility is getting higher and it’s in times like that when more surprises often occur.

    If it does happen it’s going to be a wild ride for sure. Because of what I do I welcome the extra volatility but there’s no doubt a lot of people will be hurt if there’s a sudden shift. Hopefully most are being proactive and attempting to protect themselves, but somehow I doubt it…

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