THE US could still be downgraded by ratings agencies despite passing its deficit reduction plan yesterday, say economists, leaving debt markets under a cloud of uncertainty.
The deal to cut US spending by $2.4 trillion over the next decade falls far short of S&P’s stated requirement that Washington would have to produce some $4 trillion in cuts over the medium-term to avoid a downgrade.
“The deal does not put the US fiscal position on a sustainable path and will not prevent the US from losing its AAA credit rating,” says Capital Economics’ Paul Dales.
Just $6bn in cuts are planned for this year – in the context of a deficit worth $1.049 trillion.
A downgrade would put the US on the same ratings level as China, Japan and New Zealand, and could force some funds to offload their US treasuries immediately if they have legal mandates that requires them to hold only triple-A rated debt.
ING’s James Knightly says that despite the deal: “The AAA rating is not assured with a downgrade still potentially having severe negative consequences for the economy.”
The plan voted through yesterday also leaves the lion’s share of the cuts to be decided by a congressional committee, which will report in November, with a vote scheduled for just before Christmas.
Pimco’s Mohammed El-Erian suggested that S&P must be “under a lot of pressure” from the US government not to downgrade the sovereign, which could buy the US some time until the committee reports.
However, few expect a dramatic effect on treasury yields, even if the US is downgraded. Newedge’s Bill Blain says simply: “The $7.5 trillion US Treasury market is irreplaceable.”