U.S. debt downgrade possible, but it won’t be a surprise
JEREMY HOBSON: Now to Washington, where 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 ten years. Now it looks like there are at least three possible outcomes: a really impressive deal that gets the job done; a deal full of accounting tricks and rosy scenarios; or no deal at all — which would trigger automatic spending cuts.
David Kelly is chief market strategist with JP Morgan Funds, and he’s with us now live from Boston to discuss. Good morning.
DAVID KELLY: Good morning.
HOBSON: So David, what do you think? What are you expecting from the super committee?
KELLY: Well, I’m afraid it’s most likely going to be no deal at all. The problem is, neither side has an incentive to do a deal here. The big stick which they’re using to hang over this committee is, if you don’t come up with a deal, we’re going to do automatic cuts — sequestration about $1.2 trillion.
But that doesn’t kick in until 2013. And so we’ve got a presidential election and obviously a congressional election between now and then, so if you’re the Republicans you think maybe you’ll get a better deal at the end of 2012, and if you’re the Democrats, you’re so sore over what happened last summer that I don’t think you’re in a mood to make deal either. So I’m in the no deal camp.
HOBSON: Well, what do you think would be the ramifications of that? Do you think that we could get downgraded again by another ratings agency, for instance?
KELLY: Yes, I think we could get downgraded by a rating agency, but I don’t think it’s that serious an issue. Look, we have got a chronic budget problem, but we do not have a crisis. This is something we can work through over a number of years. We need a little adult leadership to do that, but when it comes to the rating agencies — I mean the truth is the rating agencies aren’t going to tell us anything we didn’t already know about the state of the U.S. budget. And because of that I wouldn’t expect that much in they way of a long-lasting market reaction.
HOBSON: But many people who raised the big red warning flags about our debt situation — our long-term debt situation — say look, we better do something soon or we’re going to end up like Greece. I mean, if we keep punting this thing along, is that a fair situation?
KELLY: No, not at all. I mean if you look at our total debt — our net debt relative to the size of our economy — it’s about 70 percent right now, 70 percent of GDP. In Greece, it’s 160 percent of GDP. We’ve got a long, stable democracy; we have the ability to do this. We just need to make some adjustments both on the entitlement side and revenue side. If we can do that, we can deal with this problem.
HOBSON: David Kelley, chief market strategist with JP Morgan Funds, thanks so much.
KELLY: You’re very welcome.
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