Success on the part of Congress to steer the country away from a combination of tax hikes and spending cuts striking the economy at the same time won't necessarily save the country from a ratings downgrade, said Sean Egan, managing director of Egan-Jones, a ratings firm that has cut America’s sovereign debt rating twice this year.
At the end of this year, the Bush-era tax cuts and other tax breaks are scheduled to expire right at the same time automatic cuts to government spending outlined during the 2011 debt-ceiling deal are poised to kick in, a combination known as a fiscal cliff that could send the country into recession next year.
The nonpartisan Congressional Budget Office has estimated that failure to address the cliff could contract the economy by 0.5 percent next year.
Editor's Note: Google Banned This Video But You Can Watch it Here
Successfully sidestepping the cliff by punting deadlines doesn't change the reality that the country's debt burdens are too high as a measure of gross domestic product (GDP).
"The key measure on sovereign credit quality is debt-to-GDP, in the case of the U.S., it’s risen rather dramatically, from four years ago at 75 percent debt-to-GDP, to currently over 104 percent,” Egan told CNBC.
“The problem in the U.S. is that the debt has grown whereas the GDP has not grown. (While) the U.S. has had the benefit of being the major reserve currency, that only takes it so far.”
Egan-Jones cut U.S. credit ratings to AA from AA-plus in April due to debt concerns and then trimmed the rating again to AA-minus in September on concerns monetary stimulus measures could affect U.S. credit quality.
Investors, meanwhile, are growing increasingly anxious, adding recent presidential debates didn't address the issue near enough.
"The most important issue affecting the next president will be how they deal with the fiscal cliff, and not one question from one of the (debate) interviewers ... was how are you going to deal with that," Laurence Fink, CEO of BlackRock, the world's largest asset manager, said recently, according to Reuters.
Failure to deal with the cliff would have global ramifications.
“Time is of the essence and significant policy uncertainty in Washington must be addressed,” International Monetary Fund Managing Director Christine Lagarde told reporters at a G-20 meeting, according to Bloomberg.
“It will be important for the U.S. to address quickly the so-called fiscal cliff.”
© 2013 Moneynews. All rights reserved.