Wednesday, July 13, 2011

USA AAA Credit Rating on Review for Downgrade by Moody's *Congressional deadlock on raising debt ceiling*

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Great Seal of the United States

USA AAA Bond Rating Under Review

NEW YORK (Reuters) - The United States may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's debt ceiling, forcing the government to miss debt payments, Moody's Investors Service warned on Wednesday. Moody's is the first of the big-three rating agencies to place the United States' Aaa rating on review for a possible downgrade, which means it is close to cutting its rating. In a statement, Moody's said it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations."

Impending Financial Market Havoc

A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the government and businesses, further harming public finances and weighing on the economic recovery. Risks of a default on Treasuries, traditionally seen as the world's safest investment, have increased since the government reached its legal debt limit of $14.294 trillion on May 16. Congressional leaders and President Barack Obama are locked in tense negotiations to raise the limit by August 2.

Credit Rating Agencies' Actions

Standard & Poor's in April placed the U.S. rating on negative outlook, which means a downgrade is likely in 12-18 months. Unlike Fitch, which promised to cut the U.S. ratings to "restricted default" after a few missed debt payments, Moody's has said it would downgrade the United States to the "Aa" range, still considered investment grade. Previously, Fitch has stated that the USA would be placed on "watch negative" if Congress did not raise the debt ceiling by August 2. The S&P cut the USA to a long-term negative outlook for sovereign credit and Moody's has warned the USA to resolve the debt ceiling political deadlock or a short-term negative outlook rating is imminent.

USA Debt Ceiling

The Congress has routinely raised the nation's debt limit in the past. This time, however, negotiations seem to have stalled over the balance between raising taxes and cutting spending. So far, Treasury Secretary Timothy Geithner has been able to resort to extraordinary measures to delay a debt default by at least August 2. 

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