Downgrade of American Debt Almost Inevitable

Despite a deal to cut government spending, the United States could lose their top credit rating.

View of the Empire State Building in Manhattan from Queens, New York, September 1, 2010
View of the Empire State Building in Manhattan from Queens, New York, September 1, 2010 (Chris Goldberg)

Although lawmakers have reached an agreement to lift America’s debt ceiling while cutting almost a trillion dollars from projected public spending over the next decade, rating agencies are likely to downgrade the government’s creditworthiness. The budget cuts still fail to balance the books.

After weeks of partisan procrastination, Democrats and Republicans in Congress this weekend reached a compromise that extends the government’s legal ability to borrow by up to $2.8 trillion, alleviating legislators of the burden of having to debate deficit reduction again before the 2012 election.

Many trillions are expected to be added to the debt, now $14.3 trillion, in the next years.

Cuts by committee

The bipartisan debt-ceiling agreement fails to mend the deficit in the long term.

Instead, it cuts close to a trillion in discretionary spending, or less than $100 billion annually for the next ten years, while tasking a special congressional committee with finding an additional $1.5 trillion worth of spending cuts in defense and entitlements.

This committee could also find revenue increases by either eliminating tax deductions or raising tax rates — or both.

If the cuts are fully implemented — future Congresses could reverse them — the government would be $20 instead of $23 trillion in debt by 2020.

Unconvinced raters

The tentative austerity measures probably won’t convince rating agencies that America still belongs to the club of most creditworthy nations in the world.

Before the deal was announced, Moody’s warned that lawmakers needed to agree to significant spending reductions over the next decade if they wanted to avert a downgrade.

Standard and Poor’s called for $4 trillion in long-term spending cuts.

Not a disaster

Economically, a downgrade would be far from disastrous. Few countries have a AAA rating anyway.

Having the largest economy in the world, America’s sovereign bonds would probably continue to be regarded as a safe investment.

During the past weeks of political turmoil, the government was still able to borrow at low interest rates. For many investors, there simply aren’t many alternatives outside the United States to put their money.

Politically, a downgrade could be detrimental to President Barack Obama’s hopes of reelection.

With unemployment officially over 9 percent but higher when counting the millions of Americans who have given up looking for work, it is not too difficult to imagine campaign ads from opposition Republicans blaming the president for both a lackluster recovery and losing the nation’s prestigious AAA rating.

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