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Another credit downgrade looms if 'super committee' fails

By Catholic Online (NEWS CONSORTIUM)
November 21st, 2011
Catholic Online (www.catholic.org)

A deadline looms this coming Wednesday. If a "super committee" comprised of both Republican and Democratic lawmakers fail to reach a plan in order to reduce the U.S. deficit, economists warn of dire consequences.

LOS ANGELES, CA (Catholic Online) - The committee is tasked with drawing up plans for a $1.2 trillion reduction in the nation's deficit. Failure to do so will trigger an automatic "sequester" that will make cuts of that size to defense and social welfare programs beginning in 2013. Both Republican and Democrats seem distant from finding a solution after clashing over tax revenues.

The super committee has until Monday to tell the Congressional Budget Office about the impact any plan they send to Congress will have on the budget.

"Time is running out. What I can say is we are leaving no stone unturned, negotiations continue and we are looking to find a way. We recognize what's at stake and we're hoping to reach an agreement," Democrat committee member Chris Van Hollen said.

Reducing the massive deficit is relatively small. Just 0.7 percent of the gross domestic product in 2013 needs dialing back. Failure to do so could trigger another rating's agency downgrade, economists warn.

"With all this pressure to reach an agreement, it really doesn't look good if they can't find a solution," Paul Ashworth, chief North American economist at Capital Economics says.

Ashworth says that the U.S. had much more serious problems that would need tackling first.

"The U.S. is already spending 7 percent of GDP on Medicare and Medicaid [the government-run health schemes] and that will be up to 10-11 percent in the next two decades. Debt is on an unsustainable path, and if they can't reach an agreement on this, it doesn't look good for the future," he adds.

Ratings agency Standard & Poor's cited the "extremely difficult" political conditions in Washington when it made the controversial decision to downgrade its rating on US debt in August. The firm also put the U.S. "on watch' meaning further cuts may wait in the wings.

Morgan Stanley analyst Christine Tan predicted earlier this month that there was now a one-in-three possibility of another downgrade.

"If the super committee fails to reach a $1.2tn deficit reduction deal, if such a deal relies more upon accounting changes than real deficit reduction, or if congressional action lessens the impact of the $1.2tn automatic trigger, we believe this could potentially provide S&P with a pretext to downgrade the US further from AA+ to AA," wrote Tan.

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