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

The Pak Banker - - Front Page -

NEW YORK

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.

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