Why a U.S. Credit Rating Downgrade is On the Way

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It's been 18 months since Standard & Poor's lowered the U.S. credit rating, and now Moody's Corp. (NYSE: MCO) and Fitch Ratings look ready to do the same.

That's because even after the fiscal cliff deal, the country's biggest financial problems still remain: the debt ceiling debate, the uncertainty over the delayed sequester cuts and the failure to address the escalating long-term national debt.

And there's little confidence in Congress to reach an effective long-term deficit-reduction agreement by the February deadline.

"It's a fait accompli, actually," Money Morning Chief Investment Strategist Keith Fitz-Gerald said of a credit rating downgrade. "We are the most indebted nation on the face of the planet, spending has ground to a halt, lending is not happening."
 

Signs a U.S. Credit Rating Downgrade is Near

Standard & Poor's became the first of the "Big Three" ratings agencies to downgrade the U.S. credit rating when it did so on Aug. 5, 2011. Now Moody's and Fitch could downgrade the ratings one notch from AAA to Aa1 and AA, respectively.

One of the biggest reasons to expect a downgrade is that the government has continuously failed to cut money from the bloated budget. The fiscal cliff deal did nothing to resolve our spending problem.

"The recent package mitigates part of the fiscal drag on the economy associated with the fiscal cliff but does not eliminate it," Moody's said. "It does not ... provide a basis for meaningful improvement in the government's debt ratios over the medium term. The debt trajectory resulting from this [ongoing] process is likely to determine whether the AAA rating is returned to a stable outlook or downgraded."

And Fitch said in a report last month, "If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the U.S. sovereign rating could be subject to review, potentially leading to a negative rating action."

This fiasco is exactly what S&P predicted when it downgraded the U.S. credit rating.

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