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Moody's warns of U.S. credit rating downgrade if no debt ceiling deal comes soon

June 2, 2011 |  2:20 pm

House Republicans debt negotiations
Moody's Investors Service warned Thursday that it could downgrade the U.S. government's AAA credit rating if there is no progress in the next six weeks on a deal to raise the nation's $14.29-trillion debt ceiling.

The credit rating agency said it saw a "very small but rising risk of a short-lived default" by the government on its obligations to holders of Treasury bonds and other debt.

The nation reached the debt ceiling May 16. But the Treasury Department has been juggling some finances to keep the government from default as President Obama negotiates over significant spending cuts that congressional Republicans have made a condition to any increase in the debt ceiling.

Those "extraordinary measures" will run out Aug. 2, the Treasury said.

Moody's said that although it "expected political wrangling" in Washington, "the degree of entrenchment into conflicting positions has exceeded expectations."

"The heightened polarization over the debt limit has increased the odds of a short-lived default," Moody's said. "If this situation remains unchanged in coming weeks, Moody's will place the rating under review."

A meeting at the White House on Wednesday between Obama and House Republicans failed to make any progress. Treasury Secretary Timothy F. Geithner on Thursday met with the large House freshman class -- many of which are Tea Party supporters opposed to increasing the debt limit -- to make the case that a U.S. default would be catastrophic to the economy.

Moody's said "if progress in negotiations is not evident by the middle of July" it would place the U.S. credit rating on review for possible downgrade because of the risk of a short default. Moody's probably would downgrade the rating to AA shortly after such a default occurred. If default were avoided and a deal struck, the rating probably would not be reduced, Moody's said.

"Any loss to bondholders would likely be minimal or nonexistent, as Moody's anticipates that a default would be cured quickly," Moody's said.

Thursday's warning came after another leading credit rating agency, Standard & Poor's, last month lowered its outlook for the U.S. to "negative" because of the lack of progress on its large debt and budget deficit.

S&P kept the U.S. at a AAA rating, but the downgrade to the outlook meant that there was at least a 33% chance the rating would be lowered in the next two years.

Moody's said Thursday it had kept a stable outlook on the U.S. credit rating because it assumed there would be "meaningful progress" over the next 18 months in dealing with the nation's increasing debt. But that outlook could change to negative if there was no deal to address the deficit as part of the debt-ceiling negotiations, the agency said.

The U.S. would probably keep its AAA rating if a default is avoided, but "whether the outlook on the rating would be stable or negative would depend on whether the outcome of the negotiations included meaningful progress toward substantial and credible long-term deficit reduction," Moody's said.

RELATED:

President Obama, House Republicans meet on debt ceiling

Debt ceiling drop-dead date remains Aug. 2, Treasury says

Stocks fall as U.S. credit rating outlook lowered to 'negative' by Standard & Poor's

-- Jim Puzzanghera

Photo: House Republicans leaving a White House meeting on the debt ceiling Wednesday. Credit: Getty Images.

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