4 Jun 2011

Warning on US debt rating issued by Moody's

1:13 pm on 4 June 2011

Moody's has warned it may downgrade its debt rating for the United States if Congress fails to increase the debt limit in the coming weeks and risks default.

The agency has warned of political ''entrenchment'' preventing an increase.

Republicans on Wednesday blocked a bill to raise the debt limit, demanding that Democrats first agree to spending cuts.

The BBC reports that the United States risks default if Congress does not authorise more borrowing by 2 August. A downgrade would increase borrowing costs, slowing the economic recovery.

The US runs a deficit of $US1.5 trillion and is already about $US14.3 trillion in debt. The federal government reached its debt ceiling last month

Leaders of both parties agree to the need to trim the budget in the face of massive budget overruns, but Republicans refuse to allow tax increases, and the Democrats vow to protect social programmes.

The White House argues the United States would face "catastrophic" consequences if Congress does not raise the cap on total government borrowing by 2 August.

In a statement on Thursday, Moody's warned that if Congress does not act to increase the borrowing authority in the coming weeks, it could downgrade the AAA rating on US government debt ''due to the very small but rising risk of a short-lived default''.

The BBC reports Standard & Poors warned in April that it could cut its credit rating on US government debt due to concern that Democrats and Republicans would not be able to agree a plan to reduce the growing deficit.