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U.S. gets debt-rating warning from S&P, following rival Moody's

July 14, 2011 |  6:19 pm

The U.S. got another warning on its credit rating late Thursday, as Standard & Poor’s said there was a “substantial likelihood” it could lower its AAA grade on Treasury debt because of the political battle over the federal debt ceiling and spending cuts.

S&P follows rival Wall Street ratings firm Moody’s Investors Service, which on Wednesday put its top-rung U.S. rating under review for a possible downgrade.

The Treasury has set Aug. 2 as the deadline by which Congress must raise the $14.3-trillion debt ceiling or risk the government running out of money to pay some of its bills.

But the White House and Republican leaders have been at an impasse on how to cut spending to rein in the deficit. The GOP has been threatening to allow the Treasury to default on its obligations rather than lift the debt ceiling.

S&P made its announcement after markets closed, placing the U.S. rating on watch “with negative implications,” despite signs that a compromise over the debt ceiling might be emerging. The firm in April had revised its outlook on the U.S. rating to "negative," but Thursday's move was far more serious.

The decision “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 U.S. within the next 90 days,” S&P said in a statement.

But the ratings firm said a temporary fix for the debt ceiling wouldn’t necessarily forestall a drop in the nation’s credit grade. It also wants to see significant progress in reducing deficit spending.

“The action reflects our view of two separate but related issues,” S&P said. “The first issue is the continuing failure to raise the debt ceiling so as to ensure that the government will be able to continue to make scheduled payments on its debt obligations.

“The second pertains to our current view of the likelihood that Congress and the administration will agree upon a credible, medium-term fiscal consolidation plan in the foreseeable future.”

Without such a plan, S&P said, "we may lower the long-term rating on the U.S. by one or more notches  into the AA category in the next three months."

A drop into the AA rating realm would leave the U.S. in a group of countries that includes Spain, Slovenia, China and Japan. The U.S. would be considered less creditworthy than AAA-rated countries including Canada, Germany, Switzerland, Finland, Norway and Australia.

-- Tom Petruno

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