Expectations that ratings agencies will strip the US of its top notch credit rating because of the impasse over its borrowing needs were raised on Monday amid little sign of agreement between President Obama and his Republican opponents.
With a deadline of 2 August for an increase in the $14.3tn (£9tn) borrowing limit, Gary Jenkins, head of fixed income research at brokers Evolution, said there was a "high probability" of the Standard & Poor's rating agency downgrading the US from its coveted triple A rating.
"Probability of the debt ceiling being raised – high. Probability of the US achieving a credible solution to the rising debt burden in the foreseeable future – low. Probability of S&P downgrading the US sovereign rating over the next three months – high," Jenkins said.
S&P and Moody's have warned that they could downgrade the debt if the US defaults on its payments in a move that could cause global market turbulence, forcing rates higher and stripping the US dollar of its status as a reserve currency.
Fitch Ratings also warned on Monday that if the US debt ceiling is raised before the August deadline it would consider whether to downgrade the US within three to six months.
"Agreement on a credible fiscal consolidation strategy will secure the US AAA status; failure to do so will inevitably weaken the sovereign credit profile and may result in a sovereign rating downgrade," Fitch said. It has put the US on so-called ratings watch negative once before – in November 1995 – where it remained for almost six months when some federal agencies ran out of funding.
While Jenkins believes the debt ceiling will eventually be raised despite 11th hour posturing by US politicians, his concern is that the solution will not be credible in the long term which could still effectively lead to a downgrade.
"I think it is clear that the US will be downgraded by the middle of September 2011. Indeed, I would put the probability of such an event at around 80%," Jenkins said. He cited the debt ceiling and the more medium term fiscal position as the reasons for S&P warning of the potential for a downgrade. S&P said that it could maintain the AAA rating if an agreement could be reached on about $4tn of cuts and that this needed to be maintained throughout the decade. "That reads to me like it's a downgrade unless certain events happen." Jenkins said.
"For the short term then it is all eyes on the debt ceiling negotiations. But if a compromise is reached which does not include some determination to lower the general level of US debt then mark your diary for the middle of September – I accept they may move earlier – and at that stage we will find out if there are any differences in a world where the ultimate 'risk free' instrument is not even rated AAA," Jenkins said in a note to clients.
The White House rejected the latest plan by the Republicans to force through spending cuts and rule out tax rises, as negotiations over the country's debt burden continued. The White House described the Republicans as potentially causing a "severe blow to the economy".
The Guardian
More:
http://www.guardian.co.uk/business/2011/jul/18/us-debt-downgrade-standard-and-poors
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