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U.S. AAA Rating May Be Cut by S&P on Stalemate Over Budget

U.S. President Barack Obama
U.S. President Barack Obama. Photographer: Joshua Roberts/Bloomberg

The U.S. may have its AAA credit rating cut by Standard & Poor’s Ratings Services, which said there is a growing risk of a policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.

The long-term rating may be lowered by one or more notches into the AA category in the next three months if S&P concludes Congress and President Barack Obama’s administration haven’t achieved a credible solution to the rising U.S. government debt burden and aren’t likely to achieve one in the foreseeable future, according to a statement today.

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

The debt limit’s proximity has left investors unfazed, with the Treasury attracting higher-than-average demand for a third consecutive sale at an auction of 30-year bonds today. Benchmark 10-year note yields were at 2.97 percent at 11:23 a.m. in Tokyo, heading for a second consecutive weekly decline.

The dollar weakened against most major peers after S&P became the second ratings company this week to say it may downgrade the U.S. The dollar fell to $1.4184 per euro as of 11:24 a.m. in Tokyo from $1.4143 in New York. The currency was at 79.11 yen from 79.14 yen.

Authority Expiring

Obama told lawmakers they have until tomorrow to decide whether they can reach a deal to make significant cuts in the deficit or settle for another way to raise the $14.3 trillion debt ceiling before U.S. borrowing authority expires Aug. 2, two Democratic officials said.

“Today’s action by S&P restates what the Obama Administration has said for some time: that Congress must act expeditiously to avoid defaulting on the country’s obligations and to enact a credible deficit reduction plan that commands bipartisan support,” the U.S. Treasury Department said in a statement sent by e-mail.

S&P reduced the outlook on the U.S. rating to negative from stable on April 18. Since then, it said, the debate over long-term budget cuts has “only become more entangled,” with the result that “there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.”

Moody’s Move

The step by S&P followed a similar move yesterday by Moody’s Investors Service. The U.S., rated Aaa since 1917, was put on review for the first time since 1996 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said.

Treasury Secretary Timothy F. Geithner said today there is “no way to give Congress more time” on lifting the debt ceiling. After meeting with Democratic lawmakers on Capitol Hill, Geithner said that “it’s time we move.” Geithner has repeatedly said the U.S. borrowing authority will end on Aug. 2 unless Congress acts.

“We’ve looked at all available options and we have no way to give Congress more time to solve this problem and we’re running out of time,” he said. “The eyes of the country are on us and the eyes of the world are on us and we need to make sure we stand together and send a definitive signal that we are going to take the steps necessary to avoid default.”

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