U.S. likely to lose top rating: economists

WASHINGTON/LONDON Tue Jul 26, 2011 3:20pm EDT

A demonstrator holds placards to protest U.S. debt in front of the Capitol in Washington July 18, 2011. REUTERS/Kevin Lamarque

A demonstrator holds placards to protest U.S. debt in front of the Capitol in Washington July 18, 2011.

Credit: Reuters/Kevin Lamarque

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WASHINGTON/LONDON (Reuters) - The United States will lose its top-notch AAA credit rating from at least one major rating agency, according to a Reuters poll that also found wrangling over the debt ceiling has already damaged the economy.

A small majority of economists -- 30 out of 53 -- surveyed over the past two days said the United States will lose its AAA credit rating from one of the three big ratings agencies -- Standard & Poor's, Moody's or Fitch.

Respondents saw a 20 percent chance of a new recession over the next year, a prospect that some economists say has been compounded by the acrimonious political fight over what is normally a procedural legislative vote on the debt.

Lawmakers have one week left to hash out a deficit-cutting plan without which Republicans in Congress have said they will not raise the legal $14.3 trillion debt limit, risking a potentially devastating government debt default in August.

"We believe that Congress will act with an 11th hour deal to raise the debt ceiling. However, the risk of that deal failing increases with each passing day," said Guy LeBas, director at Janney Capital Markets.

"I would say that the chance of a U.S. ratings downgrade is now more likely than not."

Economists still see the probability of an outright default on U.S. Treasury bonds as remote -- 5 percent on median. link.reuters.com/nyc82s

Downgrade and default would have vastly different consequences. A ratings cut might raise the risk of recession by hurting confidence, but might allow financial markets to muddle through the next few months without incident. A default, however, would send shockwaves through the global financial system that could kick-start a new financial crisis, analysts say.

Even if this worst-case scenario is not borne out, a firm majority of respondents -- 38 out of 54 -- said the uncertainty brought about by the political acrimony over the debt has already hurt economic growth.

The U.S. economy had already been under stress in recent months. Gross domestic product expanded just 1.9 percent in the first three months of the year, and the second quarter is not expected to have fared much better. Industrial production has slowed and employment nearly ground to a halt in the last two months. The jobless rate climbed to 9.2 percent in June.

"This whole debt ceiling debate doesn't seem to be making anyone any more confident," said Sean Incremona, economist at 4Cast Ltd. in New York.

Goldman Sachs argued in a research note recently that the decline in consumer sentiment over the last few months has been disproportionate to the economy's slowdown, pegging the debt battle as a culprit.

The government's first reading on GDP in the second quarter will be released on Friday.

(Reporting by Andy Bruce, Polling by Bangalore Polling Unit; Editing by Ruth Pitchford, Leslie Adler, Chizu Nomiyama and Dan Grebler)

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Comments (27)
mward1921 wrote:
It took a. Poll of economist to figure that one out. Lets see Republicans said they will hold the world economy hostage to get what they want. That pretty much says it all.. Who gets to call Boehner amd ask why he is late with paent. Lost his job, we couldn’t be so lucky, illness and no insurance, he currently has the best.. Why is he going to miss this payment?

Jul 26, 2011 2:03pm EDT  --  Report as abuse
Bodhi2010 wrote:
i can`t wait to see that, they deserve it so much
a taste of their OWN medicine

please make it happend

Jul 26, 2011 2:06pm EDT  --  Report as abuse
SeaWa wrote:
The damage has already begun. Just because we may avoid a default, doesn’t mean that the US will be as trusted. It appears that the US has gone from being absolutely reliable to only reliable when congress wants to be. That damage cannot be undone.

Jul 26, 2011 2:16pm EDT  --  Report as abuse
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