As a deadlock continues over automatic spending cuts, an analyst told CNBC the U.S. is living in a "fantasy world" and will need to implement trillions more in budget reductions.
U.S. markets seemed to have shaken off worries over the $85 billion of automatic spending cuts known as the "sequester" that began to go into effect over the weekend, with the S&P 500 finishing in positive territory for the first Monday in 2013 and the Dow close to hitting its record closing high on Monday.
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Despite the sanguine reaction of markets, analysts told CNBC that sequestration, which constrains the country to make $1.2 trillion in budget cuts over 10 years—with $85 billion in 2013 alone—would have a negative impact on the economy and more would need to be done.
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Stephen King, chief global economist at HSBC, said that the U.S. was living in a "fantasy world" over its growth forecasts.
"If you look at the projections from the Congressional Budget Office (CBO) they assume that growth goes back to between 4 to 5 percent in real terms between 2014 and 2018. Their numbers suggest that the U.S. will post the fastest rate of productivity growth of any decade in the last 50 or 60 years," King told CNBC's "European Closing Bell."
"Even allowing for the fact that there's some [debt] reduction coming through the sequester, there's still a degree of wishful thinking with regard to the economy which probably isn't going to come true," he said.
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"What happens in a year or two when we see that the growth rate is nothing near to what the CBO is assuming and actually that the underlying budgetary arithmetic is not much better than Southern Europe's?" King asked.
David Riley, global managing director of sovereign ratings at Fitch Ratings, told CNBC's "Closing Bell" that the failure to resolve the sequester would not see the U.S downgraded. Fitch, however, has had a negative outlook on the country's AA rating since 2011.
"You'd rather have the cuts less front-loaded but we don't live in an ideal world. It's better that there's some deficit reduction than none at all and we don't think this will derail the U.S. economic recovery."
Riley said some nominal growth and low interest rates were in the country's favor, but extra cuts will be needed.
"When you look at the medium-term of the rising tide of spending, they're going to need to do, at least and in an optimistic scenario, another $1.6 trillion of additional deficit reduction on top of the $1.2 trillion, and more likely it will be $3 trillion just to stop the debt from continuing to rise."
The lack of investor concern in the U.S. was reflected by investor Warren Buffett, who told CNBC on Monday there was nothing to worry about. The U.S. was a "strong country that would overcome what 535 people [in the Congress] do. It will work over time though it doesn't look like it every day," Buffett told CNBC.
