S&P renews US debt warning

Agence France-Presse

Posted at Jul 22 2011 11:18 AM | Updated as of Jul 22 2011 07:18 PM

WASHINGTON - Ratings agency Standard & Poor's warned Thursday that the fight over the US debt ceiling could exacerbate the global tensions arising from Europe's troubled economies.

S&P also reiterated that it could downgrade the US debt rating if politicians cannot reach a deal to raise the country's debt ceiling by August 2.

"We believe any additional stresses caused by a protracted standoff in the US would likely amplify already tense market conditions in Europe in light of significant fiscal imbalances in Greece, Portugal, and Ireland," the ratings agency said.

"Clearly, a default by the US government... could be substantially more serious," it said, comparing the impact to the global financial implosion of 2008.

"In contrast with then, however, most European countries are today in a far weaker fiscal position and, in our view, less able to provide substantive economic stimulus."

The warning came as the White House said Thursday it saw "momentum" toward a pact to avert a disastrous early August debt default -- though it cautioned against reports of an imminent deal.

"We still believe that the risk of a payment default is small, though increasing," S&P said.

On July 14 S&P warned that it might cut the country's top triple-A rating because of the standoff between President Barack Obama's White House and Republican opponents over the gaping budget deficit and the debt ceiling.

S&P said then 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.

That would also hit the ratings of a number of major government-controlled or government-linked businesses and institutions that also issue debt.

Such sweeping downgrades would have an effect on financial institutions which hold the high-graded debt as reserves and collateral.

The impact would come not just because the US is downgraded, but also because the downgrade would have "a systemic and global macroeconomic disruption," S&P said.

"This hypothetical scenario could look similar to the fall of 2008, when a loss of investor confidence and a flight to quality brought the global funding markets to a temporary standstill," said Standard & Poor's senior director Damien Magarelli.

"The US financial sectors that would be at the greatest risk would be those with business models that depend at least partially on short-term funding," including banks, funds, finance companies, exchanges, broker-dealers, and life insurers.

A downgrade of the US sovereign rating, or a "selective default" rating on its bonds, could also force the downgrade of the ratings of individual states and local governments, as well as services that rely heavily on government funding like hospitals, schools and public utilities, the agency said.