US rating may be cut again, Merrill says

The United States will likely suffer the loss of its AAA credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecast.

The trigger will be a likely failure by a US Congress committee to agree on a credible long-term plan to cut the US deficit, the bank said in a research note published on Friday.

A second downgrade – either from Moody’s Investor’s Service or Fitch Ratings – would follow Standard & Poor’s downgrade in August on concerns about the government’s budget deficit and rising debt burden. A second loss of the country’s top credit rating would be an additional blow to the sluggish US economy, Merrill said.

“The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan” to cut the deficit, Merrill’s North American economist, Ethan Harris, wrote in the report.

“Hence, we expect at least one credit downgrade in late November or early December” should a plan fail to materialize, he added.

The budget cuts, mostly in discretionary spending, would weigh further on a fragile US economy, Merrill said. In the same report, the bank reduced its growth expectations for the US to 1.8 percent for 2012 and 1.4 percent for 2013.

Moody’s, which has a negative outlook on the US’ AAA rating, said it is looking at several other factors, including the results of presidential elections and the expiration of the Bush-era tax cuts late in 2012, to decide on the rating.

“It’s not that we’re waiting just for this committee to decide on the rating,” Steven Hess, Moody’s lead analyst for the US, told Reuters in an interview last week.

Failure by the committee to come up with an agreement, he said, “would be negative information but it is not decisive in our view about the rating”.

Hess did not rule out the possibility of an early move on US ratings if the country’s economy slips into a recession. So far, however, the economic performance “is certainly not super positive but not a disaster either”, he said.

Fitch Ratings, on the other hand, still has a stable outlook on the US, meaning it is more likely to revise that outlook to negative before actually downgrading the rating.

In its latest report on the US, Fitch says a “negative rating action”, which could be only an outlook revision, could result from a weaker-than-expected economic recovery or by failure by the US committee to reach agreement on at least $1.2 billion in deficit-reduction measures.