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Due to the political brinkmanship and uncertainty caused by the lingering fiscal fight between Democrats and Republicans, the U.S. gold-plated sovereign credit rating might be downgraded by other credit rating agencies (CRAs), Jacob Kirkegaard, a senior fellow at the Washington-based Peterson Institute for International Economics, warned Tuesday.
A credit rating downgrade for the United States by other CRAs are "near certain already, due to this current standoff, no matter what happens," Kirkegaard said in an interview.
Global rating agency Standard & Poor's decision to strip the U. S. of its triple-A credit rating in August 2011 after months of fierce partisan fight on raising the government's debt limit sounded a wake-up call on the effectiveness of the U.S. political system to manage the country's mounting public debt. The U.S. federal government has been shut down for the first time in 17 years starting Oct. 1 and Treasury Secretary Jacob Lew has warned that a debt limit agreement needs to be reached no later than Oct. 17.
On Tuesday, global rating agency Fitch Ratings placed U.S. 'AAA ' credit rating on rating watch negative (RWN), as U.S. authorities have not raised the federal debt ceiling in a timely manner before U.S. Treasury Department exhausts its extraordinary measures.
"If we go over the debt ceiling on Oct. 17, the Administration will be forced to go into prioritization of debt and interest payments, and there will be no default," he said.
However, by prioritizing these expenses, very severe cuts in other government expenditure items will have to be enacted to close the budget deficit in the amount of 3 to 4 percent of the country's gross domestic product (GDP), Kirkegaard contended.
Many Republicans believe that the U.S. can prioritize federal revenue to interest and principal of the national debt, just like the bill passed by two chambers of Congress and signed into law by Obama to ensure U.S. service members to get paid during the government shutdown and to guarantee that America will avoid a debt default crisis. But Democrats oppose this approach.
If U.S. government has to prioritize its spending, the country will fall into a deep recession from the fiscal drag, even if legal default is avoided, he said.
"This will obviously have dramatic negative implications on the global economy, too. However, I don't think that will happen, as I don't expect the GOP to be able to hold together in the face of a very negative market reaction on or right after Oct. 17 deadline is breached," he said.
"We will instead have a rerun of the 'TARP (Troubled Asset Relief Program) scenario' from October 2008, when the financial markets reacted very negatively to the first rejection of the TARP, which then caused a new vote to approve it four days later. Hence, I do expect a deal to be struck in the next week or so, but believe that there will have to be a negative market reaction first for it to happen," he predicted.
The costly TARP bailout program was rolled out on the heels of the 2008 financial crisis, and was first defeated by the Democrat- led House of Representatives and triggered a stock market slide before finally being approved by the lower chamber of Congress.
"In divided government like in the United States right now, one party decides to use the debt ceiling as a political weapon to take the economy hostage to extract concessions from the other side. Then the United States enters into a period of permanent political instability, reduced investments and growth, which means that simply repealing the debt ceiling might seem sensible," he argued.
That will be impossible until either both parties agree to do it, or more likely the Democrats control both houses of Congress and the White House and can simply repeal it against the wishes of the Republicans. That can at the earliest happen after the mid- term elections in 2014 and even then might require a filibuster- proof majority in the Senate, which seems highly unlikely to occur, Kirkegaardnoted.
No big decision in the 100-member U.S. Senate can advance if it cannot win 60 votes to override a filibuster, a tactic often used by senators to delay or stop action on a bill through constant talking.
"As such, I find it very difficult to imagine that the United States will repeal the debt ceiling anytime soon, despite the law now blatantly being misused by the GOP," he said.
The GOP will never accept it, as they will see it as losing leverage and will never be able to explain to their voters why doing away with the debt ceiling makes sense for the country, he added.
"What is required in the United States is in my opinion -- like what has been adopted in a number of EU (European Union) countries now -- to have a requirement of a balanced budget or small surplus over the business cycle, so that large deficits are possible in recessions, but surpluses then also (are) required during expansions. It seems probable that such a 'balanced budget over the business cycle' requirement would have to be made a U.S. Constitutional Amendment to be binding," he suggested.
