October 24th, 2011
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:
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.