Sunday Jun 17, 201203:42 PM GMT
Debt fight poses new risk to US credit rating
Sun Jun 17, 2012 3:41PM
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Wall Street rating agencies are starting to sound warnings again about the possibility of further downgrades of the once-perfect U.S. credit rating as a critical year-end deadline for addressing the nation's mounting debt nears.


Standard & Poor's Corp. this week said that the outlook for the U.S. rating is negative and suggested that it will downgrade the U.S. again if the political impasse over tax and entitlement reform extends into next year. The agency shook world markets last summer by downgrading the U.S. for the first time to AA+ from AAA.


S&P cites extreme politics as the biggest problem, and one that is getting worse as the presidential race and fight for control of Congress heats up. The agency doesn't expect the political environment to improve after the elections -- no matter who wins. At that point, Congress will have only two months to avert a massive fiscal train wreck from hitting the economy with huge tax increases and spending cuts at year's end.


"Political polarization has increased," with serious consequences for the nation's ability to manage its growing debts, said S&P analyst Nikola G. Swann. She noted that neither party has been able to muster broad bipartisan support for any major measure to address the deficit and prevent the debt from eventually getting out of control.


The agency noted that President Obama and both parties in Congress spurned the recommendations of a bipartisan presidential commission whose December 2010 plan could have brought the deficit and debt down to manageable levels. Further, another bipartisan panel appointed by the leaders of both parties last fall failed to draft an alternative plan and broke up amid partisan finger-pointing.




The move toward extremes by both parties -- with Democrats refusing to consider major reforms in fast-growing entitlement programs such as Social Security and Medicare, and Republicans refusing to consider raising taxes or even closing tax loopholes to reduce the deficit -- has made finding a middle ground increasingly difficult, S&P said.


As the political impasse deepens, it raises questions about the government's willingness to sustain its unprecedented $11 trillion mountain of public debt, S&P said, while Congress' commitment to avoiding default is increasingly being tested by politicking over legislative measures needed to increase the official debt limit.


S&P stressed that most of the risks for U.S. debt holders are political, as the fundamental economic and credit strength of the U.S. remains strong and it enjoys the benefits of the dollar's reserve-currency status and a well-managed Federal Reserve.


Rating agency Moody's is also preparing to cut ratings for 17 major banks with "global capital markets operations."  That includes Wall Street firms Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs and Morgan Stanley.


The unexpected surge in spending, which many economists attribute to layoffs during the recession that pushed many baby boomers to apply for early retirement and disability benefits, means the program from this point on will spend more than it takes in  payroll taxes, and will fall into insolvency three years earlier, in 2033, Moody's noted.


Banks have been trying to assure investors they're ready for any further rating downgrades ever since Moody's first announced a review of the sector back in February.


Fitch Ratings reiterated on June 7 that it would cut America's AAA credit rating in 2013 if the government can't come up with a "credible" deficit-reducing plan. First Post



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