The United States would immediately have its top-notch credit rating slashed to 'selective default' if it misses a debt payment on August 4, Standard & Poor's managing director John Chambers told Reuters.
Chambers, who is also the chairman of S&P's sovereign ratings committee, said on Tuesday that US treasury bills maturing on August 4 would be rated 'D' if the government fails to honour them. Unaffected treasuries would be downgraded as well, but not as sharply, he said.
'If the US government misses a payment, it goes to D,' Chambers said. 'That would happen right after August 4, when the bills mature, because they don't have a grace period.'
Fears of a technical default have been rising after budget negotiations between Democrats and Republicans fell apart in Washington earlier this week. Even a brief default by the United States would immediately increase the country's borrowing costs, weighing on the fragile economic recovery and eroding the dollar's status as a reserve currency.
On August 4, the treasury department is due to pay off $30 billion in maturing short-term debt.
With the debt talks stalled, new ideas are surfacing such as prioritising debt payments. But treasury secretary Timothy Geithner warned lawmakers on Wednesday that such a move would still cause investors to shun treasury securities.
Geithner said that because the United States now borrows roughly 40 cents of every dollar it spends, prioritising payments with no debt limit increase would require cutting 40 per cent of all government expenditures.
S&P is not the first agency to say it will downgrade the United States if a payment is missed. Rival credit rater Moody's on June 2 was the first to say it would downgrade the United States shortly after a possible ceiling-related default to the Aa range.
Moody's on Wednesday said a US credit downgrade would also affect the ratings of some states and municipalities with strong credit links to the federal government.
Chambers insisted that the likelihood of a US default is 'extremely low,' as S&P expects a last-minute increase to the country's debt ceiling just like it has happened more than 70 times since the 1960s.
He also noted a default on US treasuries — a benchmark against which all other debt is measured — would dwarf any worries about US credit ratings as global markets would crumble.
Chambers made clear, however, that S&P is more worried about the ability of the government to meaningfully cut its deficit over the next two years, with presidential elections in 2012 making a bipartisan agreement much tougher.
Source : New Age
