Merrill Lynch Says U.S. Downgrade ‘Likely’

by Andrew Stiles

Reuters reports:

The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts.

The trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit, the bank said in a research note published on Friday.

A second downgrade — either from Moody’s or Fitch — would follow Standard & Poor’s downgrade in August on concerns about the government’s budget deficit and rising debt burden. A second loss of the country’s top credit rating would be an additional blow to the sluggish U.S. economy, Merrill said.

“The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan” to cut the deficit, Merrill’s North American economist, Ethan Harris, wrote in the report.

“Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes,” he added.

It remains to be seen what kind of plan the supercommittee will come up with, but the odds of it being a “credible long-run plan” that seriously addresses the primary driver of the federal deficit — entitlement spending — is certainly low. In fact, the president has threatened to veto any plan that includes significant entitlement reform unless it also contains a massive tax increase.

Recall that Standard and Poor’s, in its recent report explaining the decision to downgrade the country’s credit rating from AAA to AA+, included a not-so-subtle dig at Republicans for even raising the prospect of default during the debt-ceiling debate and for refusing to budge on taxes. Not surprisingly, this aspect of the report was pounced on by the mainstream media. However, the following denunciation (from S&P) of the debt-ceiling deal struck in August was largely ignored: “The plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.” Indeed, major entitlement reform is the single most important step the country could take to get on a more sustainable fiscal path.

After the downgrade was announced — for the stated reason that a credible plan must contain more than “minor policy changes” to entitlements — President Obama said it was time to “get serious” about deficit reduction, and announced his intention to unveil his very own proposal that would contain: 1) a massive tax increase, and 2) “modest adjustments to health-care programs like Medicare” (emphasis mine). He wasn’t kidding, though the “modest adjustments” consist primarily of moving some numbers around on the balance sheet. Just keep that in mind the next time you that Republicans caused that downgrade (or any subsequent downgrades) by refusing to raise taxes.

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