Despite Debt Deal, U.S. Downgrade Risk Remains

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Despite Wednesday night’s deal to raise the debt ceiling and reopen the government, a downgrade in the credit rating of the United States may still be on the table, says a report in the Washington Post. The government has another few months before it reaches a new debt ceiling, but the negative credit watch issued by Fitch Ratings will remain in place.

All three credit ratings agencies — Fitch, Moody’s and Standard & Poor’s — have underscored that the United States remains a safe bet. Even as the debt limit approached, they indicated the risk of a default was low. However, the political dysfunction may have done some subtle, long-term damage. Fitch observed, “The prolonged negotiations over raising the debt ceiling … risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S.”

Moody’s placed the United States on a negative outlook for a possible downgrade in 2011. A downgrade from Fitch would prompt a broad rise in borrowing costs both for the federal government and for many state and local agencies with credit ratings that could be at risk as well.

As 24/7 recently pointed out, “Any sort of shock to the financial system typically boosts the price of gold.” It is not hard to image that a credit rating downgrade would push things in that direction. At the same time, the Fed is likely to continue its asset purchasing into 2014 with no thought of tapering. And 24/7 still sees the S&P 500 running to a record 2,000.