Merrill: Second US Downgrade Likely To Come as Result of "Super Committee" Failure

Late last week, Bank of America Merrill Lynch released a report in which they predicted that the United States would likely have its pristine AAA credit rating downgraded by another major rating agency by the end of this year.

Merrill Lynch North American economist Ethan Harris said that the two credit agencies that currently have a AAA rating for the United States, Moody's and Fitch, have both "strongly suggested" that a downgrade is likely if the country doesn't come up with a credible long-term plan to reduce its deficit spending.

As part of the Budget Control Act of 2011 (that came as a result of the debt ceiling crisis), a "super committee" was formed (aka the Congressional Joint Select Committee on Deficit Reduction) that was charged with cutting "at least" $1.5 trillion in deficit spending over the coming 10 years. This "super committee" must produce legislation by November 23rd, 2011 that would then have to be voted on and passed by December 23, 2011. If the "super committee" isn't able to produce legislation that cuts the long-term deficit by at least $1.2 trillion by the deadline, then automatic across-the-board cuts will be implemented that will hit both security and non-security programs.

There are six Republicans (Jon Kyl, Rob Portman, Pat Toomey, Jeb Hensarling, Fred Upton, Dave Camp) and six Democrats (Patty Murray, Max Baucus, John Kerry, Xavier Becerra, Jim Clyburn, Chris Van Hollen) on the "super committee", so nobody is particularly hopeful that they will be able to come up with a viable plan that both parties can agree upon.

Merrill Lynch claims that these automatic cuts would "weigh further on a fragile US economy", which would likely lead to another credit downgrade.

Earlier this year, Standard & Poor's shocked many when they revealed that they were downgrading the United States from AAA down to AA+. Standard & Poor's had issued numerous warnings saying that such a move might be coming, but nobody had really believed that they would actually pull the trigger. They did. Standard & Poor's cited concerns over the country's deficit spending and rising debt burden as two of the reasons behind the downgrade.

Moody's Investors Services already has a negative outlook on the United States' AAA credit rating, so look to them for a possible downgrade later this year if Merrill Lynch proves to be right. For their part, Moody's insists that the success or failure of the "super committee" will not be the only factor in determining whether or not the US will keep their AAA rating.

Given the current levels of deficit spending in the country, and given the current size of the federal debt, it's hard to find anybody who can make a coherent argument as to why the United States still deserves a AAA credit rating.

Source: Reuters - U.S. rating likely to be downgraded again: Merrill

Filed under: The Economic Meltdown

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