Standard & Poor’s has put the U.S. on the watch list for a possible downgrade only a day after Moody’s (NYSE:MCO), saying there’s a one-in-two chance it will downgrade the United States’ AAA credit rating if the government doesn’t soon agree to raise the debt ceiling, and warning that the cut could come as soon as this month, even before the Treasury’s August 2 deadline for a deal.
S&P’s chairman of sovereign ratings committee John Chambers also warned that, “If you get a small agreement, that will lead to a downgrade.” He considers current negotiations as having the potential to result in a long-term debt overhaul, with anything less being a failure. “If 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,” said S&P.
Any credit rating downgrade has the potential to raise borrowing costs for the U.S. and for loans using the Treasury rate as a benchmark. Money managers restricted to AAA-rated investments (NYSE:TLT) would then have to dump their Treasuries, which would in turn disrupt global markets.
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However, Treasuries haven’t reacted much to the news of a possible downgrade, likely because Moody’s just issued a similar warning on Wednesday. Or maybe it’s that the market expects the pressure of a looming credit downgrade to force lawmakers to come to deal, and soon.
After the S&P’s announcement late Thursday, Treasury prices fell slightly, bringing 10-year yields up from 2.92% to 2.97%. The dollar also fell slightly against the euro to a session low of $1.42. But the euro still remains fairly low, and European markets remain sluggish as they await the results of stress tests for 90 Euro-zone banks, the results of which could force some banks to seek state aid.