NEW YORK — Could the U.S. lose its top credit rating even with a deal to raise the debt limit? Market analysts and investors increasingly say yes.
The outcome won’t be as scary as a default, but financial markets would take a blow. Mortgage rates could rise. Strapped states and cities could find it more difficult to borrow. Stocks could lose their gains for the year.
“At this point, we’re more concerned about the risk of a downgrade than a default,” said Terry Belton, global head of fixed-income strategy at JPMorgan Chase.
In a conference call with reporters Tuesday, Belton said the loss of the country’s AAA rating may rattle markets, but it’s “better than missing an interest payment.”
Even with a deadline to raise the U.S. debt limit less than a week away, many investors believe there will be a last- minute deal to avoid a catastrophic default. Washington has until Aug. 2 to raise the $14.3 trillion borrowing limit or risk missing a payment on its debt.
President Barack Obama and congressional Republicans have failed to reach an agreement to raise the debt ceiling and pass a larger budget-cutting package. Politicians have tied the debt limit and spending cuts together.
But at least one credit-rating agency has made it clear that unless that agreement includes at least $4 trillion in budget cuts over the next decade, the country’s AAA rating could be lost. Right now, the proposals under discussion cut around $2 trillion or less.
Standard & Poor’s said this month there was a 50-50 chance of a downgrade if Congress and Obama fail to find a “credible solution to the rising U.S. government debt burden.” S&P said it may cut the U.S. rating to AA within 90 days, but passing a $4 trillion agreement could prevent that.
Rising interest rates could drag on other parts of the economy, experts say. State governments and insurance agencies would be downgraded. Business confidence could sink again, leading to prolonged high unemployment.
But some investors aren’t unhappy about the thought of a U.S. debt downgrade. Don Quigley, manager of the $1.5 billion Artio Total Return Bond fund, reasons that such a move could provide a buying opportunity.
