U.S. Could Still Face Credit Rating Downgrade

by San Antonio Attorney

The U.S. House of Representatives approve an agreement to increase the government’s debt limit but does not have enough spending cuts. Because of this, the AAA credit rating of the U.S. can still downgrade anytime within the next six months.

The ratings agencies did not give any comment on the possibility of a downgrade but they have given signals that the worries over the nation’s debt crisis are not yet over.

According to the Moody’s Investors Services, it is probably going to give U.S. a credit rating of AAA at the moment but with a risk of a downgrade. This implies a potential downgrade in the future.

Fitch Ratings has pointed out the U.S. debt has to be lowered so that it can keep its current rating. The Standard & Poor’s indicated that any agreement to lift the debt ceiling should slash not less than $4 trillion from future spending cuts or else the rating is likely to be reduced to AA.

Due to the fact that the deal made by President Obama and leaders of the Congress reduces the amount of spending cuts by half of what the S&P suggested, an expert says that as early as September 2011, the U.S. could lose its AAA rating.

Janney Montgomery Scott chief fixed income strategist Guy Lebas said that ratings agencies might not have a positive outlook of the U.S. plan where most of the budget cuts will take place after the year 2013. By then, the U.S. would have accrued more debt.

Avalon Partners chief economist Peter Cardillo says that as additional details about the spending cuts surface, there’s a seventy percent probability of the U.S. to be downgraded over the next six months.

On the other hand, both Lebas and Cardillo are convinced that a credit rating downgrade will probably not be very detrimental to the U.S.

A downgrade of credit rating normally causes increase of interest rates, according to Fort Pitt Capital Group senior stock research analyst Kim Caughey-Forres. Consequently, it would be costlier for governments, businesses, and people to make a loan. The 10-year Treasury note is recognized as the floor rate of all interests, and so higher interest rates would increase borrowing rates on everything.

Nevertheless, the usual understanding that interest rates will increase dramatically due to a a credit rating downgrade may not actually hold up. Last week, bond strategists of JPMorgan Chase released a study that suggests an increase that is more gradual.

It points out only a minor increase in borrowing costs when nations lose a AAA credit rating. S&P pulled Spain, Italy, and Belgium from AAA to AA in the year 1998 but the 10-year rates had hardly moved. There were even times when the rates dropped. S&P downgraded Ireland’s AAA credit rating in March 2009, but after just one week, their 10-year rates dropped 0.18 percentage points.

Bond traders and analysts do not believe that the U.S. borrowing rates will climb considerably if the country loses its AAA crediting rating. Noting the Treasury’s’ current high demand, Caughey-Forrest as well as others say that international investors continue to believe that U.S. debt is one of the most secure investments. Numerous, money market funds, mutual funds, and banking companies consider U.S. debt very secure, even with the current threats of debt default and borrowing rates increase.

According to Peter Cardillo and brokerage BTI chief global strategist Dan Greenhaus, even if there will be a credit rating downgrade, the Treasury will still be considered as a safe haven since it’s the largest and most liquid market.

The United States is having issues paying back their debt, and you may be in a similar situation as well.  Filing a San Antonio bankruptcy can eliminate this debt, and can help you move in the right financial direction.

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