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If super committee fails, risk of another downgrade

A Joint Deficit Reduction Committee hearing October 26, 2011 in Washington, DC.

Jeremy Hobson: Well it's going to be a busy weekend for the Congressional super committee. Lawmakers have just five days left to find $1.2 trillion in cuts to the deficit over the next 10 years. And it looks like there are three possibilities: a really impressive deal that gets the job done; a deal full of accounting tricks and rosy scenarios; Or... no deal at all.

Marketplace's Amy Scott is with us live to talk about the consequences. Good morning.

Amy Scott: Hi Jeremy.

Hobson: So Amy, I guess the biggest fear here would be that another ratings agency looks at whatever Congress does and says, "that's not good enough," and they downgrade us again. Is that likely?

Scott: Well, that's right. This is a concern after Standard & Poor's knocked the U.S. credit rating from AAA to AA+ back in August.

Chuck Gabriel with Capital Alpha Partners has been following this closely. And he told me, it's not likely we'll see another downgrade -- at least, not right away.

Chuck Gabriel: The rating agencies have signaled that they are probably unlikely to downgrade further, because there are in place mechanisms that would after all enforce a sequester or across the board set of spending cuts beginning in 2013.

That means automatic cuts that would be split between defense and non-defense spending. But if Congress tries to put off or somehow get out of those cuts, we could potentially see another downgrade.

Hobson: And what difference does another downgrade make? Is there a difference with two downgrades as opposed to just one?

Scott: The worry is that there would be a big sell-off of U.S. bonds. Pension funds and insurance companies and money market funds all have rules that require them to hold highly-rated securities. But there is some flexibility in these rules.

And another analyst I spoke to said there aren't a lot of alternatives to U.S. treasuries right now, with the European debt crisis.

Hobson: Marketplace's Amy Scott, joining us live. Thanks Amy.

Scott: You're welcome.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.
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