Debt Ceiling Compromise Reached, but Will U.S. Lose Its Credit Rating?

August 1, 2011— -- Now that Congressional leaders and the president have struck a budget deal that, if passed by Congress, would prevent the U.S. government from defaulting, the country's pristine credit rating could still suffer a blow, raising the specter of an interest rate spike and a devastating ripple effect throughout the economy.

Earlier this month, the credit rating agency Standard & Poor's warned that the U.S. risked a downgrade to AA status if Congress doesn't lift the debt ceiling and reduce the total debt by $4 trillion over the next decade.

Viewed by politicians and pundits alike as overstepping, Standard & Poor's has come under fire for playing politics, and, some charge, they and other credit agencies should not wield so much power to determine the financial future of the country, particularly given the role they played in the credit crisis.

In a rare interview, the man who heads the global team at Standard & Poor's told ABC News' Jim Sciutto that reaching an agreement in Congress on a debt ceiling increase is hardly the "end of America's budgetary problems."

"If America keeps on doing what it's doing, which is having deficits of the kind it has at the moment, clearly, it's going to be looking out of place in that AAA-rated peer group," said Paul Coughlin, executive managing director of corporate and government ratings.

From the company's non-descript offices in downtown Manhattan, analysts from around the world are watching closely and contemplating a decision that could impact the bank accounts of every American and beyond.

Asked if his company is interfering in politics, Coughlin last week told ABC News that Standard & Poor's is doing what ratings agencies do. "We are making real world observations about risk," he said. "We're just a rating agency, we just grade debt according to its relative safety or riskiness."

In the case of the U.S. government, which is rated at the top of the scale, he said, ratings agencies are looking to see how much "buffer of safety is there."

"We've seen in Europe over the past decade that countries, they can become too indebted to support the level of debt. Now America is not anywhere near that..It's not Greece. But we're simply saying, however, if America kept doing this for a decade or two, it could well be."

Coughlin suggested that the country has a 10-year time horizon to balance its budget or face catastrophe. With the American population aging, he said, health spending, in particular, will become "much more burdensome."

As the nation awaits lawmakers' votes on the budget deal, it remains to be seen whether Coughlin and his team, and the other credit ratings agencies, will be satisfied enough to stave off a downgrade.

Are the ratings over-rated?

Credit rating agencies came into being in the early 1900s. Originally buyers paid for the analysis and information. But later the model changed and the bond issuers began paying for the ratings.

The three agencies dominating the field and providing credit ratings of securities issuers, both corporations that issue securities as well as local governments, are Standard & Poor's, Moody's and Fitch Ratings, a subsidiary of Fimalac. The agencies also rate the credit of sovereign countries.

Investors in the U.S. and abroad look to these ratings as a key -- and sometimes the only - component considered when evaluating whether to purchase or sell securities. And for many institutions, a healthy credit rating is a requirement for investing.

"I think the ratings agencies are over-rated,'' said David Shulman, senior economist at the UCLA Anderson Forecast. "They're just human beings writing opinions. That's who they are. It's not coming from God on high."

In the case of the credit crisis of 2007 to 2009, Shulman said, the ratings agencies didn't understand what they were doing and they continued to rate mortgage-backed securities highly, even though the issuers were, in reality, on shaky financial footing.

"My view is they were hungry for fees and the process got corrupted," said Shulman.

"The fees they were generating from structured finance, mortgage bonds, were enormous, and they were competing against one another to lower their standards because they'd lose business," he said.

An AAA rating "allows investors to buy it and feel a sense of warm and fuzzy about how safe the investment is, with respect to likelihood of default," said Shulman.

Since the credit crisis, the same agencies have maintained their dominance.

"There's a heavy reliance on the ratings agencies because there are not a lot of people who do that work outside ratings agencies,'' said Margaret Cannella, an adjunct professor at the Columbia Business School, "the credit market has not historically had the resources to do the work."

In the stock market, there may be 50 analysts covering one company like IBM. By contrast, only the three agencies may be rating a bond issuer.

Amidst public outcry, credit rating agencies have come under greater scrutiny. And several investor lawsuits are working their way through the courts, Shulman said.

"The ratings agencies have become more vigilant," Cannella said. But, she cautioned, "increased vigilance can be a good thing, but if you abuse it, in a lot of ways it's not."

She called Standard & Poor's warnings about a downgrade "grandstanding."

"This is the time to shine by being demonstrably tough, by being overly tough. On the other hand, they do have standards to uphold."

If the US does lose that AAA rating, it is estimated that the country will pay as much as $100 billion more a year in interest payments. And that will translate to higher rates for mortgages and car loans.

On the positive side -- interest rates on savings and money market accounts will also go up.

ABC News' Susanna Kim and Alan Farnham contributed to this report.