The United States may lose its top-notch credit rating in the next few weeks if politicians fail to increase the country's legal borrowing limit and the government misses debt payments, Moody's rating agency has warned.
Moody's is the first of the big-three credit rating agencies to place the United States' Aaa rating on review for a possible downgrade, meaning the agency is close to cutting the country's rating.
Standard & Poor's placed the US rating on negative outlook on April 18th which meant a downgrade is likely in 12-18 months.
A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the US government and businesses, further harming public finances and weighing on the economic recovery.
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 US Treasury debt obligations."
Risks of a default on US Treasuries, traditionally seen as the world's safest investment, have increased since the government reached its legal borrowing limit of $14.294 trillion on May 16th.
Congress has refused to raise the statutory borrowing limit until agreement is reached on cutting the fiscal deficit which was $1.29 trillion in the last fiscal year. The US Treasury Department has said if the debt ceiling is not raised by August 2nd it will have to start prioritizing payments.
Moody's said the probability there will be a default on interest payments is low, but it is "no longer to be de minimis." "If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed," Moody's said.
"However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction," the firm said.
Earlier US president Barack Obama clashed with Republican politicians in a White House meeting on deficit reduction that left doubts over securing a deal.
China's foreign ministry said today that it hoped the US government would take a responsible attitude to protect investor interests, in Beijing's latest expression of concern about the possibility of Washington briefly defaulting on its debt.
"We hope that the US government adopts responsible policies and measures to guarantee the interests of investors,"
ministry spokesman Hong Lei said at a regular news briefing in Beijing, when asked about the Moody's report.
The US dollar was on the run in Asia today following the Moody's announcement and a hint of further policy easing from the Federal Reserve unleashed a wave of panic selling, much to the relief of the hard-pressed euro.
As fiscal problems hurt not just the euro but also the dollar, traders looked to the Swiss franc as a likely safe haven for investors, boosting the currency to a record high against the dollar and the euro.
The euro leaped to $1.4205 for a gain of 0.3 per cent, having risen nearly 3 per cent from a four-month low hit earlier in the week, when players were frightened by the spectre of the euro zone debt crisis hitting big economies such as Italy and Spain.
But it hit another record low against the Swiss franc, dropping as low as 1.1494 franc before bouncing back to around 1.1550.
There is precedent for Moody's decision. In 1996 the firm put some issues of US Treasury debt on watch for a downgrade when the White House and Congress failed to extend the government's debt ceiling.
