The debt cap must be raised by August 2 if the US is to pay its bills
CREDIT rating agencies moved closer to an unprecedented downgrade of the US government's debt amid deteriorating talks in Washington, with President Barack Obama abruptly walking out of a key meeting with Republicans seeking a deal to raise the federal borrowing limit.
Moody's Investors Service said it was reviewing the government's top AAA bond rating for a possible downgrade, citing the "rising possibility" that the government's $US14.29 trillion ($13.39 trillion) borrowing limit would not be raised soon enough to prevent the US from running out of money to pay its bills.
In addition, ratings agency Standard & Poor's has privately told lawmakers and top business groups it may cut the US credit rating if the government fails to make any of its expected payments — including Social Security cheques — even if it makes all its debt payments, people familiar with the matter say.
The rating agencies' actions highlight the potential costs of Washington's inability to reach an agreement to cut the federal budget deficit.
Treasury Department officials say the debt cap must be raised by August 2 or they will run out of cash to pay the government's bills.
The S&P argument runs counter to the belief of some analysts, investors, and House Republicans who contend the US can avoid a disaster if it misses some payments while staying current on those owed to bondholders.
And until now, financial markets have mostly shrugged off the partisan bickering in Washington.
Still, any downgrade risks pushing interest rates higher, stock-markets lower, and disrupting global financial markets. U S Treasury bonds serve as the foundation for interest rates world-wide and have long been a haven for investors seeking safety and stability.
Faith in US credit had been so well established that market participants often referred to US government debt as being "risk free". But the recent stalemate in Washington has drawn that into question.
"There's obviously a risk of the US defaulting and any risk is incompatible with a triple-A rating," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.
John Chambers, an S&P managing director, told top Senate Democrats and officials from the US Chamber of Commerce and the Financial Services Forum trade group that US debt could be downgraded even before the government missed an interest payment, people who attended the meeting said.
Mr Chambers said this could occur if the US began skipping payments to other creditors, such as government programs or vendors, which would throw into question its ability to meet its obligations. He declined to pin-point what precise event would move S&P to downgrade the government's debt.
The ratings firm said any downgrade would also affect government-backed debt of Fannie Mae and Freddie Mac, which are crucial conduits of housing finance, as well as the Federal Home Loan Banks and Federal Farm Credit Banks, and all related debt.
Combined with Treasuries, that amounts to more than '$US16 trillion of debt.
Some 7000 states and municipalities could also be hit, along with bonds issued by the governments of Israel and Egypt that are guaranteed by the US government.
Moody's said in a statement that the likelihood of a US default on its interest payments was low, but no longer "de minimis". It has given the US its highest rating since 1917.
"We haven't seen significant progress on the debt limit negotiations at this point," Steven Hess, lead analyst for the US at Moody's, said in an interview. "At this point, what we're waiting to see is an actual raising of the debt limit, regardless of how they get there."
A spokesman for S&P declined to comment.
In April, S&P for the first time assigned US debt a "negative" out-look because of "very large budget deficits and rising government indebtedness" with an unclear path towards resolution.
The rating agencies' decisions carry enormous weight with Wall Street and investors, because investment decisions are often based on their analyses.
S&P's move would be in keeping with its standard procedures. Both it and Moody's have downgraded the debt of other heavily indebted countries, such as Greece and Portugal, even though they have not yet missed payments on obligations.
"They don't care anything about Democrats or Republicans or the president," said former senator Alan Simpson, a Republican who co-chaired the White House's deficit reduction panel last year. "They care about money, the bonds, and the securities. They don't give a rat's fanny about who is to blame."
ADDITIONAL REPORTING: MATT PHILLIPS