Now that the House has passed a debt deal, and the Senate is preparing to vote on it Tuesday, the end of the feud over raising the debt ceiling is finally in sight. But financial experts warn that the agreement, which slashes trillions in spending, won't necessarily prevent at least one of the big three credit rating agencies — Standard & Poor's, Moody's, and Fitch — from downgrading America's top-notch AAA rating, a move that would make it more expensive for the government, and ordinary Americans, to borrow money. Should we all brace for a downgrade and the higher interest rates that will almost surely come with it?
Yes. The ratings agencies won't be satisfied with this deal: Politicians are crowing about how they're reducing the next decade's deficit by more than $2 trillion, says Stephen B. Meister in the New York Post, but their math assumes the massive Bush-era tax cuts will expire in 2013. Let's get real — most Republicans will "vigorously oppose" allowing that to happen. Plus, the ratings agencies know this eleventh-hour deal won't cure our addiction to borrowing — so "get ready to lose that AAA rating, Uncle Sam."
"Debt downgrade: still possible"
The U.S. might have dodged a downgrade — but the economy is still in trouble: There's a chance the debt deal will be enough to prevent a downgrade, says Mohamed El-Erian, co-CEO of bond management firm Pimco, as quoted by CNBC. Standard & Poor's, which issued the sternest warnings during Congress' messy negotiations, is probably "under tremendous pressure not to downgrade" now that lawmakers have reached a deal. But regardless, the "debt ceiling debacle" and subsequent spending cuts will only be a drag on economic growth — which ultimately hurts America's efforts to create jobs and put the nation's finances in order.
"Debt deal will add to 'new normal' slowness: El-Erian"
Downgrade or no downgrade, the economy will survive: Even with a downgrade, if one comes, U.S. Treasury bonds will remain about the safest investment around, says The Economist. So there's no reason to fear that such a "well-signaled ratings drop" would cause a flight from U.S. bonds. In the end losing the coveted AAA rating might actually be a good thing for America, because once U.S. debt is no longer considered "risk-free," politicians will have to think twice before making "unsustainable spending commitments."
"The end of 'risk-free'"