NEW YORK (Reuters) – In 2011, the United States emerged from a damaging budget battle with a downgrade of its pristine triple-A rating for the first time in history. In 2013, it could be dealt even a bigger blow.
The battle over avoiding the so-called fiscal cliff is the first of a likely series of partisan confrontations in Washington in the coming year that, if not resolved, could cause more downgrades of the U.S. credit rating.
“The rating is in the hands of policymakers,” said John Chambers, chairman of Standard & Poor’s sovereign rating committee, the agency that downgraded the United States in August 2011.
In interviews with Reuters since the November 6 election, all three major rating agencies said cutting the U.S. debt rating – still among the world’s strongest – is highly likely if next year’s budget process replays 2011’s debt ceiling debacle or if the seemingly simple goal of cutting deficits goes unmet.
Should that happen, it could have a detrimental effect on the country’s cost of borrowing and could also shift some investment away from the United States, though the country’s big markets and attractiveness as a safe haven are likely to limit those effects.
In the absence of a sustainable, coherent medium-term vision for the U.S. federal budget, which has produced deficits above $1 trillion in each of the last four years, the rating will fall. The fiscal cliff is one step in that process, but the possibility of a downgrade will still loom over Washington throughout the year.
“If no budget deal is reached in the early part of next year and the debt trajectory just continues to rise … then we’d be looking at a downgrade of a notch to Aa1,” said Bart Oosterveld, managing director at Moody’s sovereign risk group.
Automatic spending cuts in January coupled with significant tax increases could take an estimated $600 billion out of the U.S. economy and push it into recession, according to the non-partisan Congressional Budget Office’s assessment of the fiscal cliff.
