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Debt Ceiling Fight Could Lead To Another Downgrade Of U.S. Credit Rating

By Bryce Covert

"Debt Ceiling Fight Could Lead To Another Downgrade Of U.S. Credit Rating"

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fitchThe rating agency Fitch Ratings has warned it could downgrade the credit rating of the United States, which now enjoys a triple-A mark, the highest rating possible. Fitch placed it on “rating watch negative,” saying it could downgrade it by the end of the first quarter next year.

While the move has been sparked by the fight over the debt ceiling and the possibility that it won’t be raised by midnight on Thursday, the downgrade could happen even if Congress is able to eke out a short-term deal to avoid defaulting. As the Wall Street Journal reports, “Fitch said the budget impasse has undermined confidence in the effectiveness of the U.S. government and economic policy.” The AAA rating basically means U.S. debt is “good as cash” and ensures that the dollar is seen as a stable and trusted currency in the rest of the world. If it’s downgraded one notch, it could “send ripples through debt markets,” the Journal notes, potentially impacting ratings for high-quality corporate bonds or municipal debt that states issue to supplement their budgets.

This would be the second time ever that the country’s debt would be downgraded. The first came after the last fight over raising the debt ceiling in 2011. While the debt limit was eventually raised and the U.S. narrowly avoided defaulting, Standard & Poor’s still dropped the country’s AAA rating to AA. The agency was clear that the move was in response to the unprecedented fight over something that has been routine for decades.

The debt ceiling has in the past been raised without policy demands and was even raised seven times under President George W. Bush. In fact, 104 Republicans who are still serving voted for that increase, with many explaining at the time why it is so important not to play games with the debt limit. Yet since 2010, Republicans have been making demands in exchange for raising it.

The last time the country narrowly avoided default and was downgraded, there were big economic consequences. The uncertainty the debate caused may have resulted in the loss of more than a million jobs. The Treasury Department found that the episode led to a sharp decline in consumer and business confidence, turmoil in financial markets that “persisted for months,” and a slowdown in job growth. Household wealth fell by $2.4 trillion in one quarter, retirement assets declined by $800 billion, and the average mortgage holder saw a $100 increase in monthly payments.

While no one knows for sure what a failure to raise the debt ceiling by midnight on Thursday would mean, the consequences are likely to be devastating. It would result in essentially a 32 percent cut in government spending. Missing one interest payment on the country’s debt could spark a 45 percent fall in the S&P stock index. The impact could be worse than the fall of Lehman Brothers, which resulted in the stock market losing half its value. It would also very likely raise interest rates for all borrowers, from the government to taxpayers, possibly permanently.

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