Bowles: Fiscal Cliff Inaction Could Lead to Ratings Downgrade

Monday, 19 Nov 2012 08:02 AM

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Failure on the part of the government to steer the country away from the fast-approaching fiscal cliff could prompt ratings agencies to strip the United States of its triple-A rating, said Erskine Bowles, co-chair of the National Commission on Fiscal Responsibility and Reform.

Standard & Poor’s downgraded the United States in 2011 when lawmakers waited until the last second to raise the country’s debt limit in a deal that did little to address longer-term debts and deficits.

Should lawmakers fail to steer the country away from the fiscal cliff — a combination of tax hikes and government spending cuts set to take effect in early January — other ratings agencies could follow suit.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

“What’s worrisome is if we get over the cliff, we don’t have a deal — and the market doesn’t anticipate that we’re actually going to be so stupid as to go over the cliff — then I think you’ll see the market really crash,” Bowles, former chief of staff to President Bill Clinton, told CNBC.

“I think you’ll see the rating agencies downgrade our credit again. You’ll see Fitch and Moody’s join S&P.”

At the end of this year, the Bush-era tax cuts and other benefits are due to expire at the same time automatic cuts to government spending outlined during the 2011 debt ceiling deal are set to kick in.

The widely feared fiscal cliff could siphon over $600 billion out of the economy next year alone.

The nonpartisan Congressional Budget Office estimates failure on the part of Congress to steer the country away from the cliff could contract the economy by 0.5 percent next year.

Lawmakers are at odds over taxes, with Democrats arguing that tax cuts should expire for the wealthy to drum up revenue, while Republicans are pushing for closing loopholes and extending tax breaks for everyone.

Tax hikes on the wealthy, many have argued, would hit small business owners and hamper hiring, which the economy really needs.

Many businesses of all sizes have put off expanding and hiring this year over uncertainty surrounding the fiscal cliff, as they don’t know what they will be paying in taxes next year.

Failure to compromise could spell disaster.

“I think you’ll see corporations lose confidence as to what we’re going to do, where we’re going to go. I think you’ll see them slow down hiring and stop capital expenditures,” Bowles said.

“I think that if we do get our house in order, the future of America is really bright and we can compete with the best and brightest, wherever they are. If we don't, we're well on our way to becoming a second-rate power,” he added.

“[W]e could go bankrupt.”

Markets have remained edgy lately with investors avoiding stocks due to uncertainty surrounding the cliff.

However, given recent improvements seen in the underlying economy such as stronger housing data and gains in employment, successful navigation away from the cliff could spark a rally in the stock market next year, some experts say.

“Investors are tripping over themselves in an attempt to lighten their positions in stocks,” Sam Stovall, chief equity strategist for S&P Capital IQ, wrote to clients recently, according to U.S. News & World Report.

“This swift exodus [from stocks] may soon be followed by a V-shaped recovery should a resolution be forthcoming.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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