Raising Debt Ceiling May Not Be Enough To Preserve U.S. Credit Rating

Unfortunately we are going to have to raise the debt ceiling. If we don’t our purchasing power will diminish, and we risk throwing the the world economy out of whack. But raising the debt ceiling alone is not enough. To perserve the nation’s “AAA” credit rating, Congress is going to have to simultaneously put into place a plausible deficit reduction program or else our rating will be downgraded.

Keeping America’s gold-plated credit rating may take both a deal to raise the debt ceiling (which will happen) and a meaningful deficit reduction plan of around $4 trillion (which is not happening). Moody’s says it wants a  ”deficit trajectory that leads to stabilization and then decline in the ratios of federal government to GDP and debt to revenue beginning within the next few years.” And here is Standard & Poor’s in a report released last night:

If a debt ceiling agreement does not include a plan that seems likely to us to credibly stabilize the U.S.’ medium-term debt dynamics but the result of the debt ceiling negotiations leads us to believe that such a plan could be negotiated within a few months, all other things unchanged, we expect to affirm both the long- and short-term ratings and assign a negative outlook, If such an agreement is reached, but we do not believe that it likely will stabilize the U.S.’ debt dynamics, we, again all other things unchanged, would expect to lower the long-term ‘AAA rating, affirm the ‘A-1+’ short-term rating, and assign a negative outlook on the long-term rating.

Read more from James Pethokoukis at Reuters

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