Merrill: Another U.S. Downgrade Coming

October 24th, 2011
in econ_news

credit-downgrade-us Econintersect:  Bank of America Merrill Lynch has forecast that second credit rating agency is likely to downgrade U.S. Treasury debt from AAA by year end (Reuters).  Standard & Poors was the first agency to make that downgrade in August.  The reason cited by Merrill would come from a failure of the Congress to come up with a credible long-term plan to address the U.S. deficit.  Merrill said the move by either Fitch or Moody’s would place a further burden on a weak U.S. economy.

Follow up:

From Reuters:

"The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan" to cut the deficit, Merrill's North American economist, Ethan Harris, wrote in the report.

"Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes," he added.

The bipartisan congressional committee formed to address the deficit -- known as the "super committee" -- needs to break an impasse between Republicans and Democrats in order to reach a deal to reduce the U.S. deficit by at least $1.2 trillion by November 23.

If a majority of the 12-member committee fails to agree on a plan, $1.2 trillion in automatic spending cuts will be triggered, beginning in 2013.

Those automatic cuts, mostly in discretionary spending, would weigh further on a fragile U.S. economy, Merrill said. In the same report, the bank reduced its 2012 and 2013 growth forecasts for the United States to 1.8 percent and 1.4 percent, respectively.

EconMatters has reported (from a Washington Post article October 18) that France is also a possible downgrade from AAA.  Because the U.S. owes so much money to France (see NY Times graphic at EconMatters), a U.S. downgrade would very likely translate to the same action for France.  As Martin Hutchinson wrote after the U.S. downgrade of the U.S. by S&P, we are seeing the death of the risk free investment.

Sources:  Reuters (at Yahoo News) and EconMatters

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1 comment

  1. Pete says :

    According to Zero Hedge, countries outside of the U.S. dumped 74 billion dollars in U.S. Treasuries, most of it over the weekend:

    "Over the weekend, we observed the perplexing sell off of $56 billion in US Treasurys courtesy of weekly disclosure in the Fed's custodial account (source: H.4.1) and speculated if this may be due to an asset rotation, under duress or otherwise, out of bonds and into stocks, to prevent the collapse of the global ponzi (because when the BRICs tell the IMF to boost its bailout capacity you know it is global). We also proposed a far simpler theory: "the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity (although not with the element of surprise - China has made it abundantly clear it will sell its Treasury holdings, the only question is when), has finally arrived." In hindsight the Occam's Razor should have been applied. Little did we know 5 short days ago just how violent the reaction by China would be (both post and pre-facto) to the Senate decision to propose a law for all out trade warfare with China. Now we know - in the week ended October 12, a further $17.7 billion was "removed" from the Fed's custodial Treasury account, meaning that someone, somewhere is very displeased with US paper, and, far more importantly, what it represents, and wants to make their displeasure heard loud and clear. (Source)

    Undoubtedly, the Chinese and other countries have recently discovered that Italy and Greece, with smaller debt to income ratios than the United States, are less riskier and carry a higher rate of return. This is because, unlike the US, the Rothschild/Rockefeller bond rating agencies have trashed their country's debt ratings, forcing them to pay a much higher interest rate than U.S. Treasuries. Hey, if you take the risk, you might as well earn the reward!



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