Credit agencies call time on US debt talks, threaten downgrade

An unprecedented downgrading of US government debt is a strong possibility as a result of a stalemate in high-level political negotiations over raising the federal borrowing limit.

Two major credit rating agencies have threatened the downgrade if the politicians don’t agree to raise the $US14.29 trillion borrowing limit in time to prevent the government from running out of money to pay its bills.

Talks between President Barack Obama and the Republicans, who hold a majority in the Congress and the Senate, broke down with the president abruptly walking out of a key meeting.

The Republicans are insisting on government spending cuts of $US2.4 trillion over 10 years as a condition of raising the borrowing limit.

President Obama and the Democrats have offered a lower spending cut figure of less than $US1.4 billion over the same period.

Moody's Investors Service says it is reviewing the government's top Aaa bond rating for a possible downgrade, citing the "rising possibility" that the limit won’t be raised soon enough.

Standard & Poor's privately has told lawmakers and top business groups it too might cut the credit rating if the government fails to make any of its expected payments – such as social security – even if it makes all its debt payments, reports say.

In an announcement today, S&P placed the US' AAA long-term and A-1+ short-term ratings on CreditWatch with negative implications, saying these could be lowered within three months.

“… 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 US within the next 90 days,” S&P said.

“We have also placed our short-term rating on the US on CreditWatch negative, reflecting our view that the current situation presents such significant uncertainty to the U.S.' creditworthiness.”

S&P added that since April 18, when S&P lowered the long-term rating to negative from stable, the political debate about the fiscal stance and debt ceiling had become more entangled.

“Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.”

Any downgrade risks pushing interest rates higher, stock markets lower and disrupting global financial markets.

Earlier, stocks on Wall Street fell to their lowest July close after Federal Reserve chairman Ben Bernanke deflated investors' stimulus hopes and the debt negotiations remained unresolved.

The Dow Jones Industrial Average fell 54.49 points, or 0.44%, to 12,437.12, its fourth loss in five days. The S&P 500 index sank 0.67% to 1308.87, also posting its fourth loss in five days. The Nasdaq Composite fell 1.22% to 2762.67.