Goldman CEO Blankfein: Fiscal Cliff Threatens US Rating, Dollar's Credibility

Monday, 24 Sep 2012 03:06 PM

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The U.S. is at risk of seeing its credit ratings downgraded and the dollar losing its status as a reserve currency due to political unwillingness to tackle a fast-approaching fiscal cliff, said Goldman Sachs CEO Lloyd Blankfein.

At the end of the year, the Bush-era tax cuts and other tax breaks expire at the same time automatic cuts to public spending kick in, a combination known as a fiscal cliff that could send the country into recession next year if left unchecked by Congress.

Lawmakers so far have been unwilling to address such tax and spending issues in an election year, though some have said they could convene in late 2012 or in early 2013 after the cliff has passed and tackle the problem with retroactive or temporary legislation.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

A quick fix is better than doing nothing, but the levels of uncertainty surrounding the fiscal cliff are so high that businesses are shying away from investing and hiring, which is threatening recovery in itself.

Meanwhile, the country could see its ratings downgraded as well.

"There's a substantial risk that we don't get action, and it will be very, very bad for the rating," Blankfein said at a panel at the Clinton Global Initiative's annual meeting, according to the Los Angeles Times.

"And it won’t be just because of our credit. It will be because of the dysfunctionality of the government, and we will deserve to be graded as a dysfunctional government."

Further delays and uncertainty could return and haunt the U.S. economy and its currency.

"And why should we be the reserve currency of the world if we can't manage the health of the economy and therefore the value of the currency?" said Blankfein, the Los Angeles Times added.

"The U.S. is an amazing beneficiary of being the reserve currency. I think people should start realizing that's the real ticking time bomb."

Fitch Ratings has kept its top-notch debt ratings for the U.S. but has given the world's largest economy a negative outlook in part due to the looming fiscal cliff and a lack of political will to deal with it.

The nonpartisan Congressional Budget Office estimates that the economy could contract by 0.5 percent next year while unemployment rates would rise to around 9 percent by late 2013 if lawmakers fail to steer the country away from the fiscal cliff.

"The uncertainty over tax and spending policies associated with the so-called 'fiscal cliff' weighs on the near-term economic outlook. A 5 percent of GDP fiscal contraction in 2013 implied under current law would, if permanent, push the U.S. into an unnecessary and avoidable recession," Fitch analysts wrote in a recent report.

"Moreover, the burden of government debt on the economy will continue to rise with potentially adverse implications for potential growth as well as increasing the risk of a fiscal crisis if agreement is not reached on reducing the budget deficit and addressing the long-term fiscal challenges associated with rising health care costs, an aging population and a narrow and volatile
tax base."

Editor's Note:
Economist Warns: 50% Unemployment, 100% Inflation Possible

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