There is a ‘growing’ caucus of Washington lawmakers in both parties who believe that another downgrade would not hurt the U.S. economy, Reuters reports, lessening the likelihood that the super committee will reach a deal by next month.
That committee must reach an agreement to cut the federal deficit by $1.2 trillion or mandatory spending cuts will take effect for the same amount in 2013. But there is growing consensus that Congress would not allow the spending cuts to take effect — particularly since they would affect the Department of defence.
The ratings agencies have promised “negative action” to the nation’s debt rating if the deficit-cutting targets are not met, but that threat is taken less seriously on Capitol Hill as lawmakers doubt there would be serious economic effects.
To an extent they are right — August’s S&P downgrade and uncertainty over the debt ceiling tanked the markets, but demand for U.S. debt became stronger than ever as bond yields declined to record levels.
But a downgrade from all three major agencies is uncharted territory — and another failure to reach significant deficit reduction will give markets more reason to doubt that it is ever possible.
Maybe lawmakers shouldn’t be shaking in their boots, but their cavalier attitude toward another downgrade could come back to bite them if the super committee can’t deal.
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