Tags: US | credit | rating | downgrade

U.S. News: Another Credit Downgrade Wouldn’t Be the End of the World

Friday, 23 Nov 2012 07:50 AM

By John Morgan

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The United States faces the grim specter of another credit downgrade, but this time it would not make much difference, U.S. News & World Report predicted.

The first downgrade, last August when Standard & Poor’s cut America’s AAA rating by one notch after Congress failed to trim yawning budget deficits, prompted a stock market selloff. The S&P 500 index lost nearly 7 percent.

However, a second downgrade would likely only harm the country’s political standing, according to U.S. News.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

“Credit ratings adjustments, in and of themselves, I don’t think are important,” said Nigel Gault, chief U.S. economist at IHS Global Insight.

“To a large extent, downgrades simply confirm what financial markets have already seen.”

After the first downgrade, many observers predicted government borrowing costs would go up, exacerbating the debt problem. But it did not happen.

“When the United States got downgraded, interest rates went down, not up,” Alan Levenson, chief economist at T. Rowe Price, told U.S. News. That may have been because Europe’s debt crisis and a slowing Chinese economy outweighed America’s problems.

“We’re winning the ugly contest,” he said.

Moody’s Investors Service has warned it’s “unlikely” the United States will keep its current Treasury ratings unless Congress approves a “large, immediate fiscal shock” that slashes government deficits.

But if the U.S. ratings are cut again, U.S. News said it will come as the nation’s economy is stronger than in 2011, as the housing market looks stronger to many, consumers are not as deeply in debt and many companies are healthy — altogether a more positive backdrop.

Separately, Reuters reported all three major ratings agencies — S&P, Moody’s and Fitch Ratings — said a U.S. downgrade is “highly likely” if the 2013 budget process turns out like the 2011 debt-ceiling debacle or if government deficits are not cut.

“Investors need to hold billions and billions of dollars,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. “Where else are they going to go? Noise out of a rating agency is not going to change that.”

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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