A deal to raise the US debt ceiling will ensure the world's largest economy doesn't default, but analysts were sceptical today whether it will be enough to avoid a damaging ratings downgrade.
While attention has been mostly focused on the long and painful political negotiations to reach a deal before the US government faced a cash crunch on Wednesday, the country's top AAA debt rating may also be in jeopardy.
A debt default would have severe consequences for the US and global economy, but a downgrade of its sovereign rating may also lead to a painful spike in borrowing costs for both Washington and Americans overall.
US President Barack Obama announced late Sunday an 11th-hour deal to avert a default by raising the country's $14.3 trillion debt ceiling by about $2.4 trillion. The deal, which was expected to be approved by lawmakers later today, also calls for roughly the same amount in spending cuts over 10 years.
Standard & Poor's warned last month that it would downgrade Washington unless it adopted a credible plan to reduce the debt and long-term deficit levels. The ratings agency had indicated $4 trillion in spending cuts would likely be sufficient to avoid a downgrade.
The current deal leaves most of the cuts to be identified by lawmakers later, and most would not kick in for several years in order to avoid dragging down the weak US economy.
Ratings agency Moody's said last week that it believed the US would likely continue servicing its debt and keep its coveted AAA rating, but could get hit with a 'negative outlook' under which it would review Washington's rating for a possible downgrade.
Analysts noted that the cuts, while huge in nominal terms, are modest when spread out over 10 years and are compared to the size of the US economy. They are estimated to account for no more than 0.2% of GDP in the first year.
Analysts have warned that much of the savings in the deal would be wiped out if the US economy fails to muster strong growth. The US economy recorded 1.3% growth in the second quarter, after 0.4% in the first.
They said a one-notch downgrade would probably result in manageable near-term risks, but could result in substantial long-term effects including increased borrowing costs.
