Remember back in August 2011 when Standard & Poor’s downgraded the US credit rating from Aaa to Aa+? Yeah, me too. S&P attributed it to:
“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”
And guess what? The situation hasn’t improved. Congress still can’t work together to get anything done, sequestration is looming, and Fitch Ratings is warning that they might follow suit and downgrade our credit rating if lawmakers don’t make credible progress on a long-term deficit-reduction strategy.
According to Fitch:
“Further delay in reaching agreement on a credible medium-term deficit reduction plan would imply public debt reaching levels inconsistent with the U.S. retaining its ‘AAA’ status despite its exceptional credit strengths.”
They went on to say that a credible plan could include a mix of tax increases and spending reductions but that it’s up to US lawmakers to decide on the specifics set a timeline for deficit reduction. They also noted that, due to our aging population, entitlement reform will be needed to keep spending in check.
As before, these sorts of hits to our credit rating could reduce confidence in Treasury securities. If investors start to question the “risk-free” nature of Treasury bonds, borrowing prices will rise. Those higher borrowing costs will increase the amount we spend on servicing our debt which means we’ll have to cut even deeper (and/or raise taxes even further) to get the deficit under control.
And while the idea of higher rates might be sound good to income investors, higher rates will devalue existing bonds. Fun, fun, fun.
So… What do you think will happen? Will we escape 2013 without another credit downgrade? Remember, even if Congress deals with the sequestration issue there will be at least one more debt ceiling showdown before the year is out…