US economy to face downgrade risk in 2013
Major rating agencies say cutting US debt rating is likely after replay of 2011’s debt debacle
In 2011, the United States emerged from a damaging budget battle with a downgrade of its pristine triple-A rating for the first time in history. In 2013, it could be dealt even a bigger blow.
The battle over avoiding the so-called fiscal cliff is the first of a likely series of partisan confrontations in Washington in the coming year that, if not resolved, could cause more downgrades of the US credit rating.
"The rating is in the hands of policymakers," said John Chambers, chairman of Standard & Poor's sovereign rating committee, the agency that downgraded the United States in August 2011.
In an interview since the November 6 election, all three major rating agencies said cutting the U.S. debt rating - still among the world's strongest - is highly likely if next year's budget process replays 2011's debt ceiling debacle or if the seemingly simple goal of cutting deficits goes unmet.
Should that happen, it could have a detrimental effect on the country's cost of borrowing and could also shift some investment away from the United States, though the country's big markets and attractiveness as a safe haven are likely to limit those effects.
In the absence of a sustainable, coherent medium-term vision for the U.S. federal budget, which has produced deficits above $1 trillion in each of the last four years, the rating will fall. The fiscal cliff is one step in that process, but the possibility of a downgrade will still loom over Washington throughout the year.
"If no budget deal is reached in the early part of next year and the debt trajectory just continues to rise ... then we'd be looking at a downgrade of a notch to Aa1," said Bart Oosterveld, managing director at Moody's sovereign risk group.
Automatic spending cuts in January coupled with significant tax increases could take an estimated $600 billion out of the U.S. economy and push it into recession, according to the non-partisan Congressional Budget Office's assessment of the fiscal cliff.
The effects will be gradual, but significant, with the unemployment rate possibly rising to 9 percent.
If Congress goes over the cliff, Moody's said it will watch how the economy deals with the abrupt shock and will maintain the current negative outlook it holds on the United States.
Ultimately, if Congress and the president can't reach a deal to stabilize and eventually reduce the debt, now at $16 trillion, Moody's will probably cut the United States' current Aaa rating.
Fitch, meanwhile, said even a deal to avert the cliff might not be enough to save the country's AAA rating.
Temporary measures to stave off the budget shock without a credible strategy for the years beyond could earn the country a downgrade, said David Riley, managing director for sovereign ratings at Fitch. The country needs a combination of increased revenue and reduced spending, Riley said. That plan needs to be bipartisan and credible over the medium-term, he added, calling a cliff-induced recession "wholly unnecessary."
Rating agencies will also be watching talks on raising the debt ceiling next year. S&P cut the United States to AA-plus from AAA on August 5, 2011, blaming bitter debt debates that threatened to plunge the country into default and Republican obstruction during a process that was for years a formality.
If the same happens this time, Riley said, Fitch could slash its rating during the first half of the year.