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 (
) -- 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:
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.
Consumer credit rates would follow.
If the U.S. has to pay higher interest rates, the rates charged on mortgages, credit cards and other consumer debt will likely rise as well. According to CreditCards.com, as of May 2011, American consumers owed $2.43 trillion, of which approximately $777 billion came from credit cards. Higher interest rates would boost that number, and likely increase defaults and bankruptcies.
The economy would suffer.
The U.S. economy has been slow to come back from the 2008 subprime mortgage debacle, and the recovery has been fragile at best. Higher mortgage interest rates could hammer an already crippled housing market which, in turn, could reduce demand for consumer goods. Jobs would likely be lost, and the U.S. economy could tumble back into a protracted recession.
Upgrades aren't easy to achieve.
Standard & Poor's, Moody's, AM Best, Fitch and other rating agencies have taken a beating in the international press of late. Their failure to predict the 2008 crash and, more recently, the European debt crisis has exposed the agencies to claims that they've been too hard on private companies and too lax with state and governments. With their reputations and continued relevance on the line, rating agencies aren't likely to rush to reverse their decisions to downgrade national debt ratings. If the U.S. joins the ranks of countries with iffy ratings, it's likely to remain in those ranks for some time.
National credit and credibility go hand in hand.
Since the collapse of the Soviet Union, the U.S. has been viewed by many as the last superpower. Nothing persuades like success, and its military and economic strength have given the U.S. a solid platform from which to promote its policies to the rest of the world. But if the United States' credit rating is downgraded again, other countries may decide that the U.S., a country that can't keep its own financial house in order, is no longer a credible leader. Emerging economies like India and, of course, China may claim greater international influence, and the U.S. may well dislike the policies they pursue.
Only time will tell if the U.S. will continue to enjoy a strong credit rating and the international respect that accompanies it. But if Congress wants to avoid another downgrade, the time to adopt a credible, bipartisan debt reduction plan is definitely now.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.