The news from S&P yesterday came as the 2 August deadline for the US to raise its borrowing limits looms with cross-party talks still failing to reach a consensus. The rating agency has subsequently placed US AAA long-term and A-1+ short-term sovereign credit ratings on watch with negative implications.
President Barack Obama has reportedly walked out of one meeting with opposition Republicans to discuss the cuts and the new debt ceiling. There may still not be a consensus but yesterday the two parties did manage to agree on $1.5trn (£930bn) of cuts, with more to come.
However, this did not stop S&P saying there was a 50% chance of it lowering the AAA-rating that it has held for the past 70 years within the next three months. It added that it had grave concerns over the continuing discussions becoming “more entangled” with neither side willing to give ground.
"Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling," the agency explained. “We believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years.”
David Harris, Schroder’s senior portfolio manager for US fixed income expects the debt ceiling to be raised before the deadline, saying: “This is a particularly contrived limit on US government borrowing. However, the risk of a policy mistake leading to a missed interest or principal payment would have a very negative and lasting impact on US credibility even if the experience is brief and investors are made whole.”
He added that if the worst-case scenario of a downgrade to default does come through it will be temporary.
While all the talk is of future cuts, the US public debt continues to grow, rising to $14.3trn at the end of May, from $10.6trn in January 2009.
