6/1/2012 6:53 PM ET|
What if US gets downgraded again?
The rating agencies have put the US on notice -- again. Experts offer advice on how investors can prepare.
The rating agencies have put the U.S. on notice, as Forrest Gump might say, again: Come up with a credible plan to deal with the budget deficit or face yet another downgrade. And that warning has investors wondering what, if any, moves to make with their money should Uncle Sam's credit rating get dinged -- again.
We've been down this road before. A little less than a year ago, the rating agencies, after issuing a similar warning, did in fact downgrade the U.S. credit rating (in the case of Standard & Poor's, by one notch from triple-A to double-A), and nothing all that bad happened to most of our investments. Yes, there was a good deal of volatility last August. But, ultimately, with few exceptions, the sky didn't fall. Stocks, bonds and commodities didn't collapse.
There was no "rapid re-pricing" as some money managers said would happen when the credit agencies followed through on their warnings. "Medium- to long-term, it has not appeared to have any substantive impact, said Greg Gocek, a financial analyst and independent investor in the Chicago area.
Now, many experts don't expect history to repeat itself. Investment professionals and others think lawmakers will reach a temporary agreement on the debt limit and avert another downgrade.
4 reasons a downgrade won't happen
What's more, the probability of a major budget deal being reached in early 2013 is higher than usual for at least four reasons, according Jeffrey Kleintop, a financial analyst and the chief market strategist with LPL Financial.
One, the economic impact of the many scheduled tax increases and spending cuts is already set to begin in 2013, he said. The fiscal head wind comprising both tax increases and spending cuts under current policy totals more than $500 billion, or 3.5% of the gross domestic product. The 2013 budget changes, primarily consisting of tax increases, are already in the law and would need to be changed to mitigate or restructure them to be less of an economic drag. If not, a return to recession may be looming in 2013.
Two, the debt ceiling will be hit again in early 2013 and require legislative action to approve an increase.
Three, the rating agencies have warned that they will be watching in 2013 for the U.S. to take actions to return to a path of fiscal sustainability.
And four, President Barack Obama and a newly elected Congress will have maximum political capital to make it happen in early 2013.
"The most likely outcome is a fiscal tightening that exceeds 1% of GDP is likely next year," said Kleintop. In fact, he predicts a fiscal tightening of more than $200 billion -- with about half from tax increases -- totaling about 1.3% to 1.5% of GDP. From his perspective, the $200 billion is made up of the likely expiration of the payroll tax cut ($110 billion), a reduction in discretionary spending (of about $80 to $90 billion), and the imposition of the 3.8% surtax on investment income from high earners ($21 billion).
"This combination of about $100 billion in tax increases and $100 billion in spending cuts may be the sweet spot for markets," Kleintop said. "It is significant but not enough, by itself, to cause a recession; it may allay the immediate concerns of the rating agencies and avert a downgrade of our debt, and it may boost confidence that we can address our long-term fiscal imbalances and return to the path of fiscal sustainability. This is why the makeup of Congress is so important as Washington attempts to avert the budget bombshell from going off and taking the economy and markets with it."
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"And four, President Barack Obama and a newly elected Congress will have maximum political capital to make it happen in early 2013."
Seriously?! The author automatically assumes BO will be re-elected and gives no credence to the notion of a Romney victory in November.
Message to article author: BO will be lucky to be re-elected, especially after the dire news out today re. the economy.
Your article makes a big assumption "And four, President Barack Obama and a newly elected Congress will have maximum political capital to make it happen in early 2013." This isn't news, it is Proproganda. Shame on MSN for trying to make voters believe that this whole situation is hopeless with another 4 years of the most incompetent president in my lifetime. Obama knows how to campaign but is way over his head when it comes to ideas on how to fix any of the problems plaguing the country.
"Fool me once, shame on you. Fool me twice, shame on me." You won't fool me again Obama, we have seen you for what you are, a slick, corrupt, Chicago machine politician.
ALL BUDGET CUTS NEED TO START AT THE TOP
FROM ALL THE PLACES THAT COULD NOT AND DID NOT GET THE JOB DONE RIGHT IN THE FIRST PLACE
The people in charge failed to get the job done, so they should be down graded, or better yet FIRED
The salaries these people are getting is OUT OF HAND, we get that under control, we might have a fighting chance
until then, we dont stand a chance in HELL of getting this budget even close to being under control
THAT AND THEIR OVER SPENDING ON DUMB STUFF
If that solution prevents the credit agencies from downgrading, then those agencies are pretty much useless. And if the author thinks that such a solution ought to be enough to prevent a downgrade, then he's an idiot.
And yes...assuming that Obama will be the president after the November elections, or assuming that he will work hard to get something done before inauguration day, is very irresponsible journalism and quite naive, respectively.
You can't borrow and print money for ever, before investors notice.
Remember the DEMOCRATS have not had a BUDGET in over three years....... Instead they chose to blame the Republicans in the House for passing bills.
I truly wonder if Obama is upset about our economy, or is he happy to be fulfilling his fathers dream........
If it were to happen again, it would serve the politicians right! They are responsible for the mess we're in now. The public doesn't make the decisions about how many millions and billions are spent for buying friendship of other countries. It really hurts to have to say this,
This mess isn't all Obamas fault, or even Bushes fault.
The stupid CONGRESS has to approve most high-dollar spending.
There definitely needs to be some depts merged in state and federal depts., and employee cuts in both.
Why do we keep throwing good money after bad?!
Hmmmmm, someone is a little bias, assuming Obama is going to win.......
Hell why even have an election? Lets just crown Obama KING and bend over?
I can't wait for Obama to leave, and if he doesn't.......the Rodney King riots will look like a day in the park..............
Hmmm...Lets see we have a customer, who has never paid a dime back of principle in 60 years, and can only make the existing payments by borrowing from another bank. hmmm... Yeah, the USA should have a top notch credit rating....
It would be funny if it were not true... We take in 2.4 trillion / year in revenue, and spend 3.8 trillion, and owe 15.7 trillion... If we didn't spend a dime for the next 6 years we still would be in debt. Mr. Obama you were hired to fix things, not make them so much worse!
I will fire you in November, plan accordingly...
Question: What if the credit rating is down graded for the United States of America ?
Answer: Build more Prisons to house all of the Legislative, Executive, and Judicial branches.
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