Moody's to review US triple-A debt rating

 

Ben Bernanke said a default on the US debt would be ''a major crisis''

Ratings agency Moody's has said it may cut the US AAA debt rating, citing the "rising possibility" the US could default on its debt obligations.

The agency warned the likelihood the US would fail to raise its statutory debt limit in time to avert default was low but not insignificant.

It came as a fifth day of cross-party talks loomed in Washington after a bad-tempered end to Wednesday's meeting.

US Fed chief Ben Bernanke has said a default would cause a "major crisis".

Emotions were on the rise on Capitol Hill on Thursday, as Senate Majority Leader Harry Reid, a Democrat, took to the Senate floor to denounce House Republican Leader Eric Cantor.

During talks on Wednesday evening, Mr Cantor reportedly told President Barack Obama that revenue increases simply were not going to happen, and urged him to accept a short-term deal instead of a budget that would carry through to the presidential election in November 2012.

That brought a strong reaction from Mr Obama, who reportedly said: "Enough is enough. ... I'll see you all tomorrow," before leaving the room.

'Rising default risk'

President Obama needs the Republican-led House of Representatives and Democratic-held Senate to sign off a deal to close the US deficit, while allowing Washington to borrow past a 2 August deadline.

US federal government debt

  • US government currently runs a $1.5tn budget deficit, requiring it to issue debt in the form of treasury bills, bonds and other securities
  • Public debt was $14.3tn on 31 May, up from $10.6tn when Mr Obama took office in January 2009
  • Most is held by the public, with the rest held in US government accounts
  • Congress has voted to raise the US debt limit 10 times since 2001

Sources: US Treasury, Congressional Research Service, Congressional Budget Office

Moody's to review US debt rating

He has said he is willing to countenance cuts to social safety-net programmes dear to Democrats, as long as there are tax rises for the rich.

Republicans have rejected the latter proposal, saying that would stifle investment and job growth.

Moody's became the first of the big three ratings agencies - the others being Standard & Poor's and Fitch - to place the US's triple-A rating on review for a possible downgrade.

"The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes," Moody's said.

"As such, there is a small but rising risk of a short-lived default."

The US hit its $14.3 trillion (£8.9 trillion) debt ceiling on 16 May, but has since used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating.

When it came to the crunch in the past, Congress regularly voted to raise the debt ceiling, giving government access to the cash it needed.

This year, however, newly empowered Republicans have demanded steep cuts in government spending in return for raising the limit.

Mr Obama has proposed a package of up to $4 trillion in budget deficit reduction over the next 10 years, but Republicans have rejected that and other proposals because it calls for raising taxes.

'Childish'

In the Senate on Thursday Mr Reid called Mr Cantor "childish" and said he should not be part of debt negotiations any longer.

Mr Reid said that while some Republican leaders were willing to "negotiate in good faith", Mr Cantor "has shown he shouldn't even be at the table".

Meanwhile, Mr Cantor, Mr Obama and other congressional leaders on Thursday afternoon held talks aimed at forging an agreement. No further talks were scheduled for Friday.

On Wednesday at the White House, President Obama was said to have demanded that budget negotiators find common ground by the end of the week.

He made the remark while heatedly rejecting Mr Cantor's call for a short-term deal based on spending cuts, according to Democratic officials and Republican aides familiar with the talks.

In testimony to Congress on Wednesday, Mr Bernanke said the Fed would renew stimulus efforts if the economy remained weak.

The Fed expects to keep its ultra-low interest rate policy in place "for an extended period", he said.

Analysts said that Mr Bernanke had only raised the possibility of a further stimulus, and was not saying that it was necessary.

 

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  • rate this
    +2

    Comment number 22.

    I don't understand how raising the debt ceiling will help this situation. If they raise it, the US will be back in this situation soon enough and the default will be even more serious. If they don't raise it, they will default but at least they can re-shape the debt and try to get it under control. If the US stopped sending so much on defence, they may begin to make sort through this mess

  • rate this
    +9

    Comment number 3.

    Perhaps this is a sign of the end of the western world as leading bankers. Watch this space for China and India to take its place.

 
 

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