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5 Reasons to Fear Another U.S. Rating Downgrade

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- The Congressional super committee that was charged with developing a credible plan to reduce the federal budget deficit has declared defeat. The super committee couldn't come to consensus in time to reach its reporting deadline, and probably wouldn't have been able to develop a politically acceptable deficit reduction plan even if given more time to do so. Now, fingers are pointing all over Washington, and many observers fear that the U.S. may be hit with yet another downgrade of its credit rating by Standard & Poor's, or if other rating agencies follow suit.

The super committee's inability to reach a compromise that both political parties could swallow might not, by itself, trigger a rating downgrade. The super committee was created as a sort of "Hail Mary pass" by Congress in the hope that a smaller group of legislators could put partisan politics aside and actually get something done. But hope is not a strategy, and it's no surprise that a committee whose members were handpicked to advocate on behalf of their respective parties would be as bitterly divided as the Congress itself. Rating agencies probably half-expected the super committee to break down, so its failure to reach agreement probably won't trigger any major alarms.

However, if Congress responds to the super committee's failure with another round of partisan theatrics -- that could generate another downgrade of the United States' rating. After all, it's Congress, not the super committee, that's responsible for bringing the country's finances back into line. If the members of Congress continue to posture than compromise, the ratings agencies may well decide that the United States' ability to pay its debts has come into serious question and lower the national credit rating accordingly.

A rating downgrade is not a default. Even if the United States' credit rating is downgraded, the nation will still be able to repay its debts. However, another downgrade would still be cause for concern for at least five reasons:

1. Interest rates would increase. As we've recently seen in Europe, countries with downgraded credit ratings have to pay higher interest rates to borrow money if they can get credit at all. The U.S. currently owes more than $15 trillion, and the national debt continues to mount. If the nation has to pay higher interest rates on the money it borrows, its debt levels can only escalate.

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