Bank of America: U.S. Debt Will Be Downgraded Again in Weeks

The United States will be smacked by a devastating second downgrade in its credit rating within weeks, Bank of America warned on Friday.

In August, the U.S. was stripped of its cherished aaa credit rating by Standard & Poor’s after political fights over America’s debt ceiling spawned fears of a default.

Bank of America analyst Ethan Harris wrote that another ratings agency—either Moody’s or Fitch—will likely follow suit in late November or early December, causing the economy to decelerate even more.

“The ‘not so super’ Deficit Commission is very unlikely to come up with a credible deficit-reduction plan,” Harris wrote. “Hence, we expect at least one credit downgrade in late November or early December when the Super Committee crashes” (emphasis added).

In his aptly titled analyst’s note “Enjoy It While It Lasts,” Harris explained the reasoning behind his bombshell prediction:

We expect a moderate slowdown in the beginning of next year, as two small policy shocks—another debt downgrade and fiscal tightening—hit the economy. … The [Deficit Commission] committee is more divided than the overall Congress. Since the fall-back plan is sharp cuts in discretionary spending, the whole point of the committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge, and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan.

Writing for Business Insider, Joe Weisenthal said, “This is quite a stunning prediction, mainly because nobody is talking about this. And though the experts were 100 percent wrong in thinking that a downgrade would increase borrowing costs, it did cause a major market jolt when it happened, leading to a major blow to confidence in August and September. Another round of that would certainly not be helpful.”

As long as the U.S. remains cavalier about reducing its staggering debts, the markets will respond accordingly.