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'Drop in the Ocean’ Cuts Mean 2-Notch Downgrade: Strategist

Monday, 1 Aug 2011 | 4:28 AM ET

Following the last-minute debt deal agreed by President Barack Obama and congressional leaders, one strategist is predicting the rating agencies should downgrade US debt by two notches.

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The “US debt deal" package cannot disguise that the proposed cuts are a drop in the ocean relative to the current US budget deficit , said Marc Ostwald, a strategist at Monument Securities in London in a research note.

The deal also does nothing to hide the weakness in the US economy as highlighted by a second quarter growth figure of just 1.3 percent, according to Ostwald, who believes quantitative easing has been a failure.

“The failure of QE1 (a first round of quantitative easing) and QE2 to stimulate the US economy, in effect because trying to use monetary policy to cure structural weaknesses in the financial and housing sectors and politics, and colossal imbalances in the economy, was always doomed to failure” said Ostwald.

“A US ratings cut should be delivered this week (and should properly be a 2-notch cut to AA with negative outlook), but whether it will or not is another question,” he said.

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