U.S. Debt Rating: Economists Wait to Hear From S&P

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Now that President Obama has signed the debt ceiling deal and averted a default, economists are waiting to see if ratings agency Standard and Poor's will downgrade the nation's credit rating.

The uncertainty surrounding the US's now-perfect AAA rating has also thrust the three major ratings agencies into the spotlight, raising questions about the significance and boundaries of their credit assessments.

Moody's Investors Service on Tuesday evening affirmed its AAA U.S. government bond rating, though it lowered its outlook to negative.

"The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-$1.5 trillion by year's end have virtually eliminated the risk of such a default, prompting the confirmation of the rating at Aaa," Moody's stated in a report.

At stake in all this is not only interest rates the US must pay on its $14.4 trillion debt, but a host of rates for consumers, from mortgages to car loans to credit cards. A downgrade of US debt would cause interest rates of all kinds to edge up and that would cost the US and consumers billions of dollars. The stock market plunged yesterday partly on worries about this possibility.

Moody's assigned a negative outlook to its rating, saying it could downgrade the US if fiscal discipline weakens in the coming year, further "fiscal consolidation" does not take place in 2013, the economic outlook "deteriorates significantly," or there is an appreciable rise in the government's spending "over and above what is currently expected."

Earlier on Tuesday, Fitch Ratings released a statement confirming its AAA rating for the U.S. over the short-term. But Fitch's report said the country must make "tough choices on tax and spending" over the medium term and it will "conclude its scheduled review of the U.S. sovereign rating by the end of August."

Now the only holdout is S&P, which warned last month that the U.S. risked a downgrade to AA status if Congress did not lift the debt ceiling and reduce the total debt by $4 trillion over the next decade.

Ethan Harris, Bank of America Merrill Lynch economist for North America, said he expects S&P to downgrade the U.S. rating in the near future to AA.

"The downgrade is a close call, but still it seems likely," Harris told ABC News. "The S&P has said it wants to see clear signs that the US is moving onto a sustainable debt path. That means stabilizing debt as a share of GDP. The likely $2.1 trillion in cuts in the current legislation falls well short of the $3 to $4 trillion needed to stabilize the ratio."

But Peter Hooper, chief economist with Deutsche Bank Securities, said the likelihood of a downgrade in the next few months is "still low."

"The fact the deal passed with a comfortable majority and fairly strong bipartisan support includes a significant step in the right direction though a lot more needs to be done," Hooper told ABC News. "The ratings agencies may be encouraged by the progress made, but they want to see how this deal plays out and how the joint select committee operates."

On top of the $1.2 trillion in spending cuts the Senate and House approved, a "super committee" must make an additional $1.5 trillion in spending cuts between 2012 and 2021, according to the Congressional Budget Office.

Ed Kashmarek, economist with Wells Fargo, said it is unclear why the ratings agencies have become more vocal, or perhaps just received more publicity, in the past year when the U.S. has struggled with its debt for some time.

"For S&P to say it wants to downgrade our debt rating if we don't cut $4 trillion, where was that demand a year ago?" Kashmarek said. "Is it because of we have a near 100 percent total debt to GDP ratio. Is it for political reasons? It's hard to say."

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