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

Economists Debate if S&P Will Downgrade the U.S.

ByABC News
August 2, 2011, 10:40 AM

Aug. 3, 2011 — -- 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."