Tags: credit | rating | cut | 30%

Survey: Cut to US Credit Rating Risk Stands at 30%

Friday, 23 November 2012 10:04 AM EST

There is a 30 percent chance the United States will suffer another downgrade to its credit rating as a result of political wrangling to avoid automatic tax and spending changes, a Reuters poll showed.

The outcome of negotiations between political leaders on how to avert the "fiscal cliff", an enforced $600 billion budget tightening of tax increases and spending cuts, will likely decide whether the U.S. manages to avoid a downgrade.

In Britain, facing its own debt problems worsened by a moribund economy, the chance it will lose its own top-notch "AAA" credit rating has risen slightly over the last few months, the poll showed.

The United States lost one of its coveted AAA grades from ratings agency Standard & Poor's last year, when it said a budget deal last year did not go far enough to tackle the country's debt pile.

While most economists think it unlikely the other two big ratings agencies — Fitch and Moody's — will follow suit, the three-in-ten chance represents a still significant risk.

"We expect a resolution to the fiscal cliff debate before the end of the year. But it is likely to entail higher deficits in the near term and will make the longer term fiscal outlook even more opaque," said Kristian Toedtmann, senior economist at DekaBank.

"Rating agencies will not appreciate this."

A top credit rating generally helps keep government borrowing rates low, as many investors like pension funds will only invest in "AAA"-rated assets.

While economists expect the fiscal cliff will be averted, another stop-gap solution would tempt the ire of ratings agencies.

"The risk is that the government's solution to the fiscal cliff doesn't do enough to curb future deficits," said Scott Anderson, economist at Bank of the West in California.

"Policymakers' short-term worries that deep spending cuts and tax increases will throw the economy back into recession in 2013 may actually increase the odds of a ratings agency downgrade next year."

Even if the U.S. does manage to hold on to its rating, the poll showed weak growth coupled with high unemployment will likely push the Federal Reserve to extend one of its stimulus programmes.

A majority, 27 of 29 analysts in the survey, said the Fed will buy more Treasuries when its current Operation Twist programme, designed to lower long-term borrowing costs, ends in December. Median estimates were for monthly buys of $40 billion worth of bonds.

Britain's deteriorating economic outlook was the main reason why the chances of it losing its "AAA" credit rating have risen to 40 percent from 35 percent in July.

France lost its top credit rating from Moody's on Monday, which cited doubts about Socialist President Francois Hollande's ability to fix public finances.

Britain too faces a tough task. Its government borrowed much more than expected in October, thwarting efforts to reduce the budget deficit.

But judging from the lack of market reaction to France's downgrade, the fear of a sudden surge in British borrowing costs, were it downgraded, might not be justified.

"I don't think it (a ratings downgrade) will have a massive impact because the markets are assuming that kind of risk anyway," said Stephen Lewis, chief economist at Monument Securities in London.

"The rating agencies tend to be followers of market expectations rather than trend setters, so it is not much of a factor for the markets."

© 2024 Thomson/Reuters. All rights reserved.


Economy
There is a 30 percent chance the United States will suffer another downgrade to its credit rating as a result of political wrangling to avoid automatic tax and spending changes, a Reuters poll showed.
credit,rating,cut,30%
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2012-04-23
Friday, 23 November 2012 10:04 AM
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