S&P warns of US downgrade

Agence France-Presse

Posted at Jul 15 2011 11:49 AM | Updated as of Jul 15 2011 07:49 PM

WASHINGTON - The United States' second debt downgrade warning in two days jacked up the stakes Thursday for the country's financial stability as politicians battled over how to cut the deficit.

Standard & Poor's followed rival Moody's when it warned that it might lower the country's triple-A rating because of the standoff between President Barack Obama's White House and Republican opponents over the deficit.

"The political debate about the US' fiscal stance and the related issue of the US government debt ceiling has, in our view, only become more entangled.

"Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling," the powerful ratings agency said.

S&P said there was "at least" a one-in-two chance that it would cut its US rating within the next 90 days, an act that would almost certainly send Washington's cost of borrowing shooting up.

A downgrade would come "if we conclude that Congress and the administration have not achieved a credible solution to the rising US government debt burden and are not likely to achieve one in the foreseeable future," S&P said.

The warning -- which officially ruled the US gold-standard AAA rating was on credit watch with negative implications -- came as the White House and Republicans remained at odds over a long term plan to slash the huge US deficit.

With Washington now having reached its maximum legal capacity to borrow more and yet facing rising spending and debt service obligations, Republicans are refusing to raise the debt ceiling unless they can obtain a deficit plan to their liking.

But if the $14.3 trillion debt ceiling is not increased by August 2, the government has warned, it faces the choice of defaulting on its existing debt or huge cuts in spending that could contract the economy, or a combination of both.

S&P called the chance of a US default on its debt "small, though increasing."

But it warned that, if there is even a brief delay in debt service payments -- anticipated in case politicians only agree a deficit plan at the last minute -- the government could also be hit with a "selective default" rating, also likely to push up borrowing costs.

"Standard & Poor's still anticipates that lawmakers will raise the debt ceiling by the end of July to avoid those outcomes."

However, it pointed to an alternative outcome nearly as bad: that, with the debt cap still a political hostage, the government slashes spending to keep up debt payments.

"If the government is forced to undergo a sudden, unplanned fiscal contraction... we think that the effect on consumer sentiment, market confidence, and, thus, economic growth will likely be detrimental and long lasting."

S&P added that to satisfy its standard for a top-flight credit rating, both political parties needed to convincingly agree on a long-term plan to reduce the country's deficit.

"We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a 'AAA' sovereign rating," it said.

The S&P action came a day after rival Moody's also placed the United States' gold-standard credit rating on downgrade watch for the same reasons.

In a quick reaction late Thursday, the US Treasury did not contest S&P's warning.

"Today's action by S&P restates what the Obama Administration has said for some time: that Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support," Treasury Under Secretary for Domestic Finance Jeffrey Goldstein said in a statement.