President Barack Obama has signed into law the bill raising the U.S. debt ceiling. Default has been averted, but rating agencies could still downgrade U.S. top notch credit status. Moody's and Fitch announced their ratings on August 2, while Standard & Poor's said it could only uphold its AAA rating after reviewing the details of the deal.
It's unclear whether S&P will downgrade the United States' credit rating if its experts are dissatisfied with the plan.
Commitments must be honored
Moody's Investors Service said on Tuesday it retained the AAA credit rating of the United States but changed the outlook to negative.
Fitch Ratings said the United States remains under a review, which it expects to complete by the end of August after Congress approved the debt-limit deal.
Standard & Poor's placed the U.S. AAA rating on CreditWatch on July 14, saying there is a 50% chance it would be downgraded within 90 days, even if an agreement to raise the debt limit is reached in Congress.
More spending cuts are needed to stabilize the United States' annual budget-deficit-to-GDP ratio, S&P said. Both Moody's and S&P want to see $4 trillion in cuts over the next decade, whereas the recently passed deal will cut half this amount.
In these difficult economic times, the U.S. government is unlikely to base its budget policy on the opinions of rating agencies, said Yelena Matrosova, director of the macroeconomic research center at the consulting firm BDO Unicon. "The U.S. economy is in a pre-recessionary state, and the main economic driver -consumer demand - is shrinking," she said. "Cutting government spending in this environment will only bring the U.S. economy closer to recession."
Yevgeny Nadorshin, chief economist with the financial corporation Sistema, said the debt-ceiling bill approved by Congress and signed by Obama "does not contain measures that would radically improve the debt and deficit problem and allow the United States to maintain its prime credit rating."
In other words, the rating agencies have good cause to downgrade the United States' credit rating.
"The main reason to lower its credit ratings is to warn investors that they risk losing money," said Yevgeny Gavrilenkov, managing director and chief economist at Troika Dialog. "But U.S. fiscal policy has already resulted in losses for many investors."
The debt crisis has already caused the dollar's exchange rate to fall by 12%-15% against the euro, the Japanese yen, the Brazilian real, the Swiss franc and other global currencies. In other words, investors in U.S. securities in these countries have already lost 12%-15% of their money.
Why the delay?
There is a simple reason why the rating agencies are not rushing to pass sentence on the U.S. economy: delivering such a blow to the foundation of the global financial system would have unpredictable consequences. Besides, according to Ms. Matrosova, dollar assets constitute a "huge part" of the global financial market and "there is no alternative to them," while there is an abundance of free funds in need of an investment instrument.
But fear of destabilizing the global economy is not the only factor. According to Mr. Gavrilenkov, the consistently high rating of U.S. debt has for years been the yardstick by which other countries are measured. Revising the U.S. rating would upend the ratings agencies' system.
Experts are unsure if rating agencies will downgrade U.S. credit status. Ms. Matrosova thinks they will not. This may tarnish the agencies' reputation, she said, but "their reputation has already been tarnished and confidence in them was shaken after 2007." According to Ms. Matrosova, the rating agencies are minor part of the financial system but one that cannot be removed without destroying its entire infrastructure, because pension and sovereign wealth funds and insurance companies choose investment instruments based on the ratings of top agencies.
Yevgeny Nadorshin thinks the U.S. credit rating will be downgraded to reflect the current situation in the financial market. He did not predict when this will happen but said he is sure that dropping the U.S. rating by one notch will not be a major shock to the financial market.
"The markets' optimistic response to the U.S. debt-ceiling deal shows that the markets are not overly worried by the possibility of downgrade," Mr. Nadorshin said.
The views expressed in this article are the author's and may not necessarily represent those of RIA Novosti.
