From AAA to AA: a Projection for the US following the Fiscal Cliff

AAIf the US goes over the fiscal cliff there will be more financial repercussions than $600 billion in expiring tax cuts and instant spending cuts. According to Fitch, one of the top three credit rating agencies in the world, the cliff will also cost the US its top rating of AAA.

The agency’s biannual report states, “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 US sovereign rating could be subject to review, potentially leading to a negative rating action.”

Standard and Poors infamously downgraded the US in August of 2011 to AA+ following a similar episode of partisan in-fighting over the debt limit. With a lack of communication on the Hill once again threatening the nation’s credit rating, an important measure for investors of economic health and stability, lies at risk.

The US economy is projected to contract by 5% if Congress does not avert this financial “dooms-day” but if they can, growth will slow to 1.5%. “A multi-year deficit reduction plan to stabilize U.S. debt and public finances [is] likely to see the country keep its AAA rating” and adopt the better of the two bad scenarios for US growth.

Congress should keep this in mind during the final days of negotiations as an added incentive to come to agreement. America’s future path hangs in the balance: will the decline be reversed and the AAA rating rightfully remain, or will the fiscal cliff and the subsequent AA+ downgrade occur? In less than 11 days the answer will be clear.

Posted by: Sophia Higgins

Sources: Reuters, the Hill

Photo Credit: From AAA to AA @ photostream courtesy of Flickr user fdecomite

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