U.S. credit rating facing another cut soon, Bank of America warns

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America’s credit rating is likely to take another hit before the end of 2011, threatening renewed market turmoil, Bank of America Merrill Lynch economists warn.

In a report on Friday, BofA Merrill said it sees little hope of a breakthrough by the congressional “super committee” on deficit reduction. The bipartisan group has until Nov. 23 to identify $1.5 trillion in deficit cuts over the next 10 years -- through reduced spending, tax hikes or both.

“The ‘not-so-super’ deficit commission is very unlikely to come up with a credible deficit-reduction plan,” wrote Ethan Harris, North American economist at BofA Merrill. “The committee is more divided than the overall Congress.”

Ratings firm Standard & Poor’s on Aug. 6 shocked global markets by cutting its U.S. debt rating to AA+ from AAA, marking the first time in history that the nation’s creditworthiness was considered less than top-rung.

S&P at the time said that the plan Congress had just worked out to raise the federal debt ceiling fell short of what was needed to stabilize the nation’s longer-term finances.

The ratings firms are likely to draw the same conclusion if the super committee fails in its task, Harris warned. “The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan,” Harris wrote. “Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes.”

But it’s unclear whether the ratings firms would want to move that quickly, based on the language they’ve used in recent months when assessing the U.S. debt situation.

S&P has a “negative” outlook on its U.S. rating. The firm warned when it cut the rating to AA+ on Aug. 5 that “we could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”

S&P’s two main rivals -- Moody’s Investors Service and Fitch Ratings -- still rate the U.S. AAA. But Moody’s, like S&P, has a “negative” outlook on its rating.

Moody’s in early August said that while the U.S. “exhibits the characteristics necessary for a Aaa rating, a rating downgrade could be triggered before 2013 by (1) any weakening of fiscal discipline between now and then or (2) a significant deterioration in the economic outlook resulting in adverse fiscal implications that are not offset.”

Fitch has a “stable” outlook on its rating, meaning it seems unlikely to lead the way on a cut.

Even if he’s right about another reduction in the nation’s debt rating, Harris said any drop in the stock market would likely be less severe than the massive sell-off that struck after S&P’s move. The Dow Jones industrial average tumbled 635 points, or 5.6%, on Aug. 8.

The market’s dive at the time followed a 10.5% plunge in the prior two weeks as the stalemate in Congress over the debt ceiling eroded investor confidence, Harris noted.

“After a month of dysfunction in Washington, the downgrade was the straw that broke the camel’s back,” Harris wrote. “We expect a smaller hit to the markets and confidence with the next downgrade.”

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