Moody's Warns of Rising Risk to U.S. Debt

Moodys warned Washington on Thursday it expects to put the U.S.s perfect credit rating on review for a possible downgrade if Congress fails to make progress on raising the countrys debt ceiling by mid-July.

The notice from the ratings agency serves as a fresh reminder to lawmakers and investors about the high-stakes negotiations surrounding the deeply-divided issue.

While the White House and Treasury Department have warned failure to raise the $14.294 trillion debt ceiling by early August will result in a financial crisis, Republicans have said the U.S. will be able to avoid a default while lawmakers negotiate deeper budget cuts.

The heightened polarization over the debt limit has increased the odds of a short-lived default, Moodys said in a statement. If this situation remains unchanged in coming weeks, Moody's will place the rating under review.

Moodys sees a very small, but rising chance of a default, which would be the first in U.S. history. U.S. bonds, or Treasurys, are seen as among the safest investments in the world.

The deadline to extend the debt ceiling passed in mid-May, but the Treasury Department stopped issuing and reinvesting government securities in some pension plans to delay a default until August 2 and give Congress time to resolve the issue.

If the debt limit is raised and a default avoided, Moodys said its AAA rating on the U.S. will be maintained. Any downgrade of the U.S. over the debt-ceiling impasse would most likely be to the AA range, Moodys said.

This simply underscores the need for Congress to move quickly to ensure that the U.S. can meet all of its obligations, while continuing to work on a consensus approach towards long term fiscal balance," said Mary Miller, assistant Treasury secretary for financial markets.

Its worth noting the Moodys comments come weeks after rival Standard & Poors placed the U.S. credit rating on watch for a downgrade. That warning helped raise the awareness of the nations fiscal troubles and also sparked alarm on Wall Street.

The Moodys warning on Thursday produced just a brief slide in U.S. stocks and a muted reaction in the bond markets as the yield on the 10-year Treasury remained near session highs.

Like many on both sides of the aisle, Moodys said the debt-limit negotiations represents a real near-term opportunity to reach a larger deal on fiscal consolidation. If this opportunity passes, the ratings company sees little chance of anything major being accomplished before the 2012 elections.

Failure to reach an agreement as part of the current negotiations would increase the likelihood of a negative outlook in the near term, because the upward debt trajectory would still be in place, Moodys said.

Politicians entrenched in the heated battle over the debt ceiling quickly responded to the Moody's warning.

"This report reinforces the point Republicans have been making all year: an increase in the debt limit without major spending cuts will hurt our economy and destroy jobs," House Speaker John Boehner said in a statement. He added that the Moody's warning "makes clear that if we let this opportunity pass without real deficit reduction, Americas financial standing will be at risk."