Tuesday, June 21, 2011

US political wrangling risks downgrade to debt as media quietly forgets massive looming debt crisis in Washington

US politicians are risking a downgrade to America's credit rating unless they reach an agreement to raise the country's legal borrowing limit, two of the world's biggest rating agencies have warned.

The outlook for America's government debt - the most widely held by investors and historically one of the world's safest investments - would be cut to negative from stable should Congress fail to deliver an agreement before the August 2 deadline, according to Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch.

Republicans and Democrats are locked in negotiations in Washington DC over how to raise the $14 trillion limit, which is legally required for the US to keep borrowing.

With the deficit set to be a key issue in next year's presidential election, there are fears that neither party will give up the ground necessary to reach a compromise until the last minute.

The Republicans are seeking significant spending cuts as a condition of any agreement, while the Democrats are keen to delay fiscal retrenchment until the economy is stronger.

The warning from Fitch was echoed by Moritz Kraemer, the head of sovereign ratings for Europe at Standard & Poor's. "The problem is this flexibility needs to be employed and for that you need political consensus," Mr Kraemer told a conference in London yesterday. "That's not very visible right now." (read more)