Thursday, July 14, 2011

US credit rating on verge of plunge

A symbolic 'dead' Wall Street Bull

Source: Press TV

Moody's Investors Service has put the United States on review for a possible credit rating downgrade amid fears of a belated congressional vote for raising the US debt ceiling.

The New York-based credit rating agency placed the United States' AAA rating on review for a possible downgrade on Wednesday over concerns that the debt threshold will not be raised in time to prevent a missed payment of principal (amount owed) and interest on outstanding bonds and notes, Bloomberg reported.

Moody's said in a statement that it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations."

The rating would likely be reduced to the AA range, and there is no assurance that Moody's would return its top-notch credit rating even if a default is quickly cured.

On June 2, Moody's had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

The report comes as President Barack Obama is considering summoning congressional leaders to Camp David this weekend to work out a plan to raise the debt ceiling.

Meanwhile, Federal Reserve Chairman Ben Bernanke has warned that a global financial crisis could take place if the US debt ceiling is not raised by August 2.

The comment came on Wednesday as Bernanke testified before the US House of Representative's Financial Service Committee, where he emphasized hat if the country's debt ceiling is not raised, the US government would choose to stop offering benefits such as Social Security payments and instead pay its creditors.

“The assumption is that as long as possible, the Treasury would want to try to make payments on the interest to the government debt, because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy,” he said.

Bernanke further explained that the government will have to slash domestic spending by as much as 40 percent as an alternative plan. This, however, is expected to bring the country's economic growth to a standstill.

The US reached its borrowing limit, currently at $14.3 trillion, on May 16, up from $10.6 trillion when US President Barack Obama took office in 2009.

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