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Financial Services Forum President: A Downgrade of the US Will Hurt US Economy

Raising the debt ceiling may be considered a "done deal" but the fact the cuts don't satisfy S&P's requirements has investors wondering if the downgrade shoe will drop. Stocks rallied on the news of the debt deal and industry associations from all sectors are cheering as well.

But early on the tape went red. I caught up with Rob Nichols, President of the Financial Services Forum whose members are the big banks what they think of the deal and the fears of what a U.S. downgrade could mean to the economy.

LL: What do you think of the deal?

RN: With August 2nd just hours away, we applaud the congressional bipartisanship involved with reaching this framework and believe that this agreement is the best possible path forward to restoring market confidence while putting ourselves on a path toward long-lasting fiscal responsibility.  This agreement will avoid the consequences of an unnecessary default on the nation’s obligations and  is an important step towards a sustainable fiscal future.

LL: What percent in odds do you or your members give of a US downgrade?

RN: The details are still emerging. We don’t yet know if the agreement – with the deficit reduction measures, bi-partisan, bi-cameral congressional committee, and trigger mechanisms, is enough to help the U.S. avoid losing its AAA rating.  I don’t want to put odds on it, but obviously hope we are able to preserve our current rating and the benefits it provides.

LL: Loans across the board will be impacted. Who is the most exposed?

RN: I am concerned about how a downgrade may impact the American family.  Analysts have suggested a downgrade could send interest rates up by 75 or even 100 basis points, which would increase the cost of borrowing for families.  I saw one estimate that suggested between just credit cards and mortgage payments alone, families across the country would be hit with an additional $10 billion in borrowing costs each year.

LL: Balanced Budget Amendment is on the table. There are pro's and con's to such legislation. Are you in favor?

RN: Research reveals that throughout history, in advanced and emerging nations alike, debt-to-GDP levels surpassing 90% (we are in this danger zone) are strongly associated with notably slower economic growth, more frequent and severe financial crises, higher inflation and overall economic decline. 

While we have not taken a position on the BBA its clear that unless we as a nation make a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.  What form that commitment might take – BBA, a Super Congressional Commission, a new budget process, et al is less important than the critical need to arrive at that commitment.

LL: Some of your members have been trying to educate members on the impact of debt ceiling inaction and default. Based on their meetings/conversations with them. Based on the the deal, do they think the members get it?

RN: Since early Spring, we have been meeting with Member of Congress on the consequences of inaction—for our economy, the already struggling job market, the financial circumstances of American businesses and families, and for America’s global economic leadership.

A default on our Nation’s obligations, or a downgrade of America’s credit rating, would be a blow to business and investor confidence – raising interest rates for everyone who borrows, undermining the value of the Dollar, and agitating the markets.  Most Members of Congress we have met with understand those consequences and implications.

LL: The economic recovery is still very fragile. Can a U.S. downgrade be the catalyst of another recession?

RN: It’s a concern.  A downgrade of America’s credit rating would worsen our already difficult economic circumstances. Friday we learned GDP growth was a meek 1.3% and the first quarter was revised downward significantly.  There are enough worries already about the economy's path.  Given our economic fragility we can ill afford the risks associated with a downgrade.  There are already enough headwinds impacting our economy that I hope we avoid adding yet another.

A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."


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