U.S. Credit Rating Downgrade

There's a debt deal! Rejoice!

We're saved!

Not necessarily.

From the Wall Street Journal:

Though Moody's Investors Service and Standard & Poor's Ratings Services said late Sunday they would not immediately comment on the tentative debt deal reached by President Barack Obama and Congress, past comments from the ratings agencies indicate the U.S. government's perfect credit rating could still be in jeopardy.

S&P had repeatedly said since putting the U.S. rating on review for possible downgrade that it wanted to see a deficit-reduction plan that was around at least $4 trillion. The tentative deal reached earlier Sunday appears to fall well short of that level. The agreement calls for a $2.4 trillion reduction to deficits over the next 10 years.

If S&P determines the deal falls short of meaningfully changing the trajectory of U.S. deficits, it could still cut the government's triple-A rating. S&P had previously said a downgrade would likely be into the AA range, which means the U.S. could still see its rating cut between one and three notches. A cut in the rating could lead to higher borrowing costs for the U.S.

"The impact on the AAA will depend on whether S&P sticks to what it stated back on July 14 when it placed America's rating on negative watch," said Mohamed El-Erian chief executive officer and co-chief investment officer at Pacific Investment Management Company. Pimco, a unit of Allianz, is one of the world's largest bond market investors.

El-Erian said in an emailed response to questions from Dow Jones Newswires that "a strict interpretation by S&P speaks to the likelihood of a downgrade, though I suspect, the agency is under enormous pressure not to do so."

Another major investor, money-manager BlackRock Inc., called the tentative debt deal "positive," but withheld full endorsement because of questions about the timing and scope of deficit cuts.

"Avoiding default by the U.S. government is of paramount importance, but investors also need to see a clear path toward deficit reduction that encourages confidence in the U.S. dollar," it said in a statement.