US Credit Rating Could Drop Even if Debt Deal is Made

Posted July 27th, 2011 at 4:05 pm (UTC-5)
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Financial analysts say the United States faces the loss of its top AAA credit rating even if President Barack Obama and Congress reach a deal in the next few days to raise the nation's borrowing limit.

Most analysts say the president and lawmakers will craft a last-minute deal to raise the country's $14.3 trillion debt limit before Tuesday's deadline and avert the possibility the nation may default on its financial obligations.

But even so, they say at least one of the three major credit-rating agencies — Standard & Poor's, Moody's or Fitch — could downgrade the country's credit standing because the final debt limit deal may not sufficiently trim government spending in the coming years.

Credit agency executives testified Wednesday before a congressional panel investigating their role in warning sovereign nations about their debt issues, such as was the case recently in Greece, and now the United States.

S&P President Devin Sharma told the panel that even if the U.S. credit rating is downgraded, it would not mean his agency thinks the U.S. is about to default on its financial obligations. He said a downgrade only means there is a very low probability of a default.

Standard & Poor's earlier this month placed the U.S. government on a negative credit watch, warning that it might cut the country's credit standing if it does not think the spending cuts under any agreement are big enough.

S&P says it has been looking for spending cuts of $4 trillion over the next decade. The two main plans currently being considered by Congress call for cuts ranging from $2.7 trillion to $3 trillion. The ratings agency has declined to comment on the specific debt and spending proposals.

A credit downgrade for the U.S. could prove detrimental as the country struggles to regain its economic footing. With a lower credit rating, the government's borrowing costs would likely increase, by $100 billion annually by one estimate. Interest rates on home mortgages, and loans for cars and other purchases could also increase, cutting into consumers' spending power.