Photo: Associated Press
Over the weekend we posted this prediction from Bank of America that another downgrade is likely in the next several months if the Joint Select Committee on Deficit Reduction fails to meet its $1.2 trillion deficit cutting mandate.The Super Committee must reach an agreement in the next month — and Congress must approve the cuts by the end of the year — or significant automatic spending cuts will take place across the board.
A new report from Goldman Sachs is bullish on the Super Committee’s chances of reaching an agreement — though likely not for the full $1.2 trillion — but warns that lawmakers will seek to undo the automatic cuts before they take effect in 2013.
Many of the “sequestration” cuts come from the defence Department, which said they would jeopardize national security — meaning there will be a strong movement to pare them back if the committee fails.
Failure to achieve the mandated deficit reduction and/or undoing the automatic spending cuts could precipitate another downgrade from Standard and Poors and, for the first time, negative action from Fitch and Moody’s, Goldman warns.
Each of the agencies has threatened to take action if the Super Committee fails and the cuts are eliminated, which Goldman collected in this chart:
Here’s more from the ratings agencies:
Fitch: An upward revision to Fitch’s medium to long-term projections for public debt either as a result of weaker than expected economic recovery or the failure of the Joint Select Committee to reach agreement on at least USD1.2trn of deficit-reduction measures would likely result in negative rating action. The rating action would most likely be a revision of the rating Outlook to Negative, which would indicate a greater than 50% chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade.
Standard and Poors: The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
Moody’s: Over time, this status could be threatened if further measures to address the long-term fiscal situation are not adopted, but it is early to conclude that such measures will not be forthcoming. Thus, the rating was confirmed last week at Aaa with a negative outlook.
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