US downgrade looks likely, analysts say

Associated Press

NEW YORK

Could the U.S. lose its top credit rating even if a deal is reached to raise the debt limit?

Market analysts and investors increasingly say yes. The outcome won’t be quite as scary as a default, but financial markets still would take a blow. Mortgage rates could rise. States and cities, already strapped, could find it more difficult to borrow. Stocks could lose their gains for the year.

“At this point, we’re more concerned about the risk of a downgrade than a default,” said Terry Belton, global head of fixed income strategy at JPMorgan Chase. In a conference call with reporters Tuesday, Belton said the loss of the country’s AAA rating may rattle markets, but it’s “better than missing an interest payment.”

Even with a deadline to raise the U.S. debt limit less than a week away, many investors still believe Washington will pull off a last-minute deal to avoid a catastrophic default. Washington has until Tuesday to raise the country’s $14.3 trillion borrowing limit or risk missing a payment on its debt. President Barack Obama and congressional Republicans have failed to reach an agreement to raise the debt ceiling and pass a larger budget-cutting package. Politicians have tied raising the debt limit and spending cuts together.

But at least one credit- rating agency already has made it clear that unless that agreement includes at least $4 trillion in budget cuts over the next decade, the country’s AAA rating could be lost. Right now, the proposals under discussion cut around $2 trillion or less.

Standard & Poor’s warned earlier this month that there was a 50-50 chance of a downgrade, if Congress and Obama failed to find a “credible solution to the rising U.S. government debt burden.” S&P said it may cut the U.S. rating to AA within 90 days. Passing a $4 trillion agreement could prevent a downgrade, S&P said.

The other chief rating agency, Moody’s Investors Service, said the U.S. government likely would keep its top rating if it avoids a default.

JPMorgan’s Belton said a drop to a AA rating will mean permanently higher borrowing costs for the U.S. government. And because government lending rates act as a floor for other lending rates, mortgages, student loans, corporate debt and other types of loans will become more expensive.