Saturday, July 16, 2011

US looks set to lose AAA rating

Source: Pres TV

Standard & Poor's puts the US AAA rating on formal credit watch, warning there is a chance of downgrade if talks between the White House and Republicans on raising the debt limit remain stalemated.

"Today's CreditWatch placement signals our view that, owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the US within the next 90 days," Reuters quoted a statement by the New York-based financial services company on Thursday.

The agency added, "We have also placed our short-term rating on the US on CreditWatch negative, reflecting our view that the current situation presents such significant uncertainty to the US' creditworthiness."

Standard & Poor's also warned that even with an agreement on raising the debt ceiling, it would still lower the US sovereign rating if the agency is not convinced that the deal would balance the US government's medium-term debt dynamics.

Meanwhile, talks between President Barack Obama and congressional leaders ended Thursday with no deal to raise the debt limit.

On Wednesday, Moody's Investors Service placed the US triple-A rating on review for a possible downgrade 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.

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.

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

Speaking before the US House of Representative's Financial Service Committee on Wednesday, he emphasized that 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,” Bernanke said.

He 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 USD 14.3 trillion, on May 16, up from USD 10.6 trillion when Obama took office in 2009.

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