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As the super-committee gets into its final weeks of haggling out a deficit reduction plan, questions about what will happen in the event of a failure are growing louder.A big question is: Will we get downgraded?
The verdict seems to be mixed.
Last month, BofA’s Ethan Harris warned of a likely downgrade after the super-committee’s failure.
Then earlier this week, a different analyst from BofA said not to worry.
Now Morgan Stanley is weighing in on this question, as part of a broader note about the impact of the super-committee on the economy.
From MS’ Christine Tan:
S&P reminded market observers in October that the US remains on negative watch due to its unsustainable fiscal outlook, which implies a 1 in 3 chance of further downgrade from its current
AA+ rating. If the Super Committee fails to reach a $1.2trn deficit reduction deal, if such a deal relies more upon accounting changes than real deficit reduction, or if Congressional action lessens the impact of the $1.2trn automatic trigger, we believe this could potentially provide S&P with a pretext to downgrade the US further from AA+ to AA. The initial S&P downgrade of the US’s AAA rating on
August 5, 2011 roiled the markets into severe risk-aversion mode and the GRDI, Morgan Stanley’s proprietary risk appetite indicator fell to an all-time low of -5.13.
So it’s important to bear in mind that the consequence of a downgrade would be an economic slowdown, not anything on the cost of borrowing side.
In fact, we wonder if all the analysts and pundits who, prior to the August move, predicted a surge in borrowing costs in the event of a downgrade, will identify themselves.