As the super-committee gets into its final weeks of haggling out a deficit reduction plan, questions about what will happen in the event of a failure are growing louder. A big question is: Will we get downgraded?
The verdict seems to be mixed. Last month, BofA's Ethan Harris warned of a likely downgrade after the super-committee's failure. Then earlier this week, a different analyst from BofA said not to worry. Now Morgan Stanley is weighing in on this question, as part of a broader note about the impact of the super-committee on the economy.
According to MS' Christine Tan:
S&P reminded market observers in October that the US remains on negative watch due to its unsustainable fiscal outlook, which implies a 1 in 3 chance of further downgrade from its current AA+ rating. If the Super Committee fails to reach a $1.2trn 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 $1.2trn automatic trigger, we believe this could potentially provide S&P with a pretext to downgrade the US further from AA+ to AA.
..It's important to bear in mind that the consequence of a downgrade would be an economic slowdown, not anything on the cost of borrowing side.
Read more at http://www.businessinsider.com/morgan-stanley-on-the-super-committee-and-the-chance-of-another-downgrade-2011-11
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