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US Faces Possible Credit Rating Downgrade

US Faces Possible Credit Rating Downgrade
US Faces Possible Credit Rating Downgrade
Ken Bredemeier

U.S. President Barack Obama and Congress are engaged in an intense rush to settle on a plan to raise the country’s borrowing limit beyond the current total of more than $14 trillion.  It is an effort aimed at averting a possible default on the country’s financial obligations, something that might occur as early as next Tuesday.  Underlying those negotiations is the fear that even if the debt limit is increased, the country faces the prospect that its top-level credit rating might be downgraded.

Most financial analysts and government officials say that in the next few days the president and the congressional lawmakers will reach an agreement on the debt limit.  But experts also are looking at how much government spending Mr. Obama and Congress are willing to cut during the next decade.  That could be a key point in whether any of the three major private credit rating agencies - Standard & Poor’s, Moody’s or Fitch - might cut the country’s AAA credit standing.

If the country’s rating is downgraded, that could increase the borrowing costs for the government, perhaps by as much as $100 billion a year.  It also might lead to higher interest rates for consumers.  That, analysts warn, would inhibit the country’s economic recovery.

Standard & Poor’s says it is looking for the U.S. government to cut its spending by $4 trillion during the next decade.  In recent weeks, the president and House of Representatives Speaker John Boehner sought to forge a deal to cut that much, but those talks collapsed as factions in both Mr. Obama’s Democratic Party and Boehner’s Republican Party objected to various provisions being considered.  Now, the current debt limit plans Congress is considering would cut spending by a maximum of $3 trillion.

Whether a cut of that size would be sufficient for the United States to keep its top-level credit rating is unknown.

Standard & Poor’s President Deven Sharma was non-committal on Wednesday at a hearing on Capitol Hill.  He declined to comment on any of the plans being considered.

"We're waiting to see what the final proposal is, for our sovereign analysts to really analyze it more currently," said Sharma. "We are just commenting on what is the level of debt burden, what is the level of deficit that must meet the threshold to retain a AAA [rating].”

Sharma said that even if America's credit rating is downgraded, it would not mean his company thinks the United States is about to default on its financial obligations, something that has never happened.

"All it means is there is a low probability, a very low probability of a default," he said. "That's all it means.  And if you change the rating, it means that the risk level has gone up.  It doesn't mean it's going to default.  If you believe that, they would change it to a default status."

As the August 2 debt default deadline nears, analysts say that much of the discussion among lawmakers and President Obama will likely center on how much the debt limit will be increased.  But perhaps the bigger question is whether the country’s credit rating will remain where it has always been - at the very top.  It might take weeks for the answer to that question.

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