One reason why many in Washington, DC didn’t want the debt ceiling to default is because of the risk of the US losing their triple-A status, but even as the Democrats and the Republicans came to a compromise, a US downgrade still seems likely. The US Senate is likely to pass the plan today — after passed by the House Monday — that would increase the debt ceiling by $2.4 trillion through the end of 2012. However, that isn’t enough as John Chambers, head of sovereign ratings, stated that $4 trillion in cuts would be a “good start” — almost less than half of what President Obama, Speaker John Boehner, and other congressional leaders ended up compromising to.
Weeks ago during the debt ceiling fight, S&P stated that the United States had a “50-50 chance” of having its credit downgraded, even if a compromise was reached by the deadline on August 2nd. The last thing the United States needs at this juncture is to get its credit rating downgraded as it still remains in a financial slump with unemployment above 9%. Back in 1986, Australia had its AAA status downgraded to AA and it took them until well into the 21st century before they were once again brought back to AAA status.
If the United States were to be downgraded, it could lose its AAA rating within the next six months. Moody’s Investors Services indicate that the US will have AAA status for now but with a negative outlook, meaning a downgrade could be forthcoming.
Moody’s has already put the state of Minnesota on negative outlook. “This is a reminder that having a strong, balanced economy is not enough to keep high credit ratings,” Minnesota Management & Budget Commissioner Jim Schowalter said. He added, “Sooner or later, we need to fix the state’s budget so that it does not rely on one-time solutions,” Schowalter said. “That continuing problem is particularly unfortunate because it obscures Minnesota’s many strengths, including its general economy, strong forecasting process, and conservative debt management practices. But until a structural budget balance is achieved, we cannot assume that Minnesota’s financial condition is well above average.”