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Super Committee Failure Won't Hit U.S. Rating (Update 1)

Updated to include Standard & Poor's statement, reported statement from Moody's.

NEW YORK (TheStreet) -- The Congressional super committee's failure to reach a deal on cutting the U.S. deficit will not lead to an immediate downgrade by credit ratings agencies.

"The Fiscal Committee's inability to agree on fiscal measures that would stabilize U.S. government debt as a share of GDP is consistent with our Aug. 5 decision to lower our rating to 'AA+'," said Standard & Poor's in a statement issued late Monday. "However, we expect the caps on discretionary spending as laid out in the Budget Control Act of 2011 to remain in force. If these limits are eased, downward pressure on the ratings could build," S&P stated.

Moody's Investors Service, which still has a triple-A rating on the U.S., said the impass would not "by itself," lead to a downgrade, according to a CNBC report. An email message to Moody's spokespeople was not immediately returned.

Brian Gardner, Washington research analyst at Keefe, Bruyette & Woods, argued in a note published early Monday that an immediate downgrade of the U.S. sovereign debt rating was unlikely.

However, if Congress does away with a series of automatic cuts to defense and social programs such as Medicare that are set to kick in as a result of the failure of the super committee, Gardner believes the agencies "may revisit the issue in 2012." The cuts would take effect in 2013.

Standard and Poor's downgrade of the U.S. in August "had a mixed impact on the market," Gardner contends. He notes that stocks "sold off sharply" and then "endured several weeks of volatility related to the European debt crisis." However, the move "had no immediate impact on US interest rates," with 10-year Treasury yields actually falling in the weeks after the downgrade.

In the short-term, the most important questions raised by the super committee's failure are that they raise doubts about the fate of a pair of temporary tax cuts set to expire at the end of the year.

Known as the payroll tax and a one-year "patch" to forestall the alternative minimum tax, Gardner believes both issues will be resolved by Congress before year-end but "there is downside risk for the markets and short-term US economic growth if the payroll tax cut does not get extended," he writes.

-- Written by Dan Freed in New York. Follow this writer on Twitter.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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