S&P Warns of 50-50 Shot at Downgrade for US Debt Rating

This week credit ratings agency and investor’s service Standard and Poor’s (NYSE:MHP)¬†reiterated its threat that it could slash the current AAA rating on U.S. bonds to AA or lower if the nation’s leadership does not come to a deal that would stave off a credit default and reduce the current budget deficit in the next 90 days. “While banks and broker-dealers wouldn’t likely suffer any immediate ratings downgrades, we would downgrade the debt of Fannie Mae, Freddie Mac, the ‘AAA’ rated Federal Home Loan Banks, and the ‘AAA’ rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating,” the group said in a report. “We would also lower the ratings on ‘AAA’ rated U.S. insurance groups, as per our criteria that correlates insurers’ and sovereigns’ ratings.”

As President Obama and other members of Washington leadership have warned, the implications of such a ratings cut could be dire for a domestic economy that is already burdened by an uphill battle against an intractable labor market and a deeply depressed real-estate environment, contributing to an overall stagnant economic recovery. S&P reps. have reportedly made presentations before “Freshman” members of the U.S. House of Representatives over the past two days, to ensure that many republicans who stand opposed to raising the debt ceiling under any circumstances understand the implications of their resistance.

Friday the Senate voted by majority to ‘table’ the GOP endorsed “Cut, Cap, and Balance Bill” that sought to reduce the deficit by making vast cuts in entitlement spending programs. President Obama had also guaranteed a veto on the bill in the event that it did make it to his desk. Though GOP leaders have all publicly back the bill, Democrats found it hard-headed and too uncompromising to agree too, with Sen. Harry Reid calling it the worst piece of legislation in the history of the United States government.

Talks seem to have reached another standoff after it was reported that Pres. Obama was meeting privately with Speaker of the House John Boehner to work on a bipartisan deal. Democrats, irked by the fact that they’d been left out of the negotiations, reacted very bitterly to the news which may have killed any potential agreements reached by the GOP leader and the nation’s Chief Executive.

S&P (NYSE:MHP) further notes that a credit downgrade would “likely shove the U.S. economy back into recession.” Treasury Secretary Tim Geithner has warned that if a deal is not reached by a fast-approaching August 2nd deadline, the United States of America will default on its debt for the first time in history.

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