Leaviss: US will lose AAA-rating after 2012 elections

M&G's head of retail fixed interest Jim Leaviss has warned the US will see its credit rating downgraded to AA shortly after next year’s presidential election.

The bond manager said even if a new president is appointed in November 2012, it is unlikely they will come up with a long-term austerity package to address the country’s soaring debt levels.

“Almost 10% of the US government’s revenues are being paid on interest payments – this is something the rating agencies will not stand for and the country will lose its AAA-rating if this is not addressed,” said Leaviss.

“Even if a new president comes in next year, they will not come up with a long-term strategy, so the country will become AA-rated as there is no political will to come up with a plan to scale down the debt levels.

“The country still has not recovered – unemployment should not be as high as it is.”

However, he added credit default swaps are only pricing in a 5% chance of the country going bust over the next five years.

He said the US can always print more of its own currency if growth contracts, something he also believes the eurozone should be implementing to ease the peripheral debt crisis and avert the threat of contagion.

“The US can do what peripheral eurozone countries cannot - they can print their own currency - so it is extremely unlikely the country will default,” said Leaviss.

“The eurozone should implement its own form of monetary easing to buy back weak peripheral debt to ease the crises, although the downside is this could result in inflation rising.”

Leaviss added US policymakers must try to come up with a short-term compromise to raise the country’s debt ceiling.

“It would be idiotic to miss a coupon payment and lose the country’s AAA credit rating,” he said. “I believe there will be a short-term fix with a mixture of cuts and tax rises, as it would be complete madness to miss the deadline.”