Obama tries to reach compromise to raise debt ceiling and avoid crisis

NEW YORK / SINGAPORE - Standard & Poor's will cut the US credit rating to its lowest level and Moody's Investors Service said it would reduce its ranking if the government fails to increase the debt limit, leading to a default.

S&P would lower its sovereign top-level AAA ranking to D, the last rung on its scale, said John Chambers, chairman of the company's sovereign rating committee, in an interview on Wednesday. Moody's said it would probably assign a position in the Aa range, within three steps of its highest level.

"We believe the debt ceiling will be raised and the government won't default," Chambers said in New York. "Otherwise we wouldn't have an AAA rating on the US government. It's evolving as we expected."

US President Barack Obama, a Democrat, is trying to reach a compromise with Republican lawmakers who are seeking spending cuts before they agree to raise the nation's borrowing limit, currently capped at $14.3 trillion. The Treasury has said it has until Aug 2 before its ability to pay the US debt expires.

One-year credit-default swaps are rising this year as investors seek insurance in case of a US default.

The contracts climbed to 49.42 basis points as of Wednesday in New York from this year's low of 20.81 basis points in April, according to data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market.

By contrast, one-year credit default swaps are 36.57 basis points for Japan and 143.31 basis points for Spain, according to data compiled by Bloomberg. Credit-default swaps pay the owner if a borrower fails to meet its debt obligations.

Ten-year Treasuries completed their biggest three-day loss this year on Wednesday, sending benchmark yields up by a quarter of a percentage point.

S&P put the US government on notice in April that the nation risks losing its AAA standing unless policymakers agree on and begin "meaningful implementation" of a plan by 2013 to reduce budget deficits and the national debt.

Ratings directly linked to the US government would move in step with any sovereign action, while some Aaa rankings of state and local governments may be vulnerable, Moody's said in its report on Wednesday.

The US would risk not winning back its Aaa credit soon if the nation's debt limit causes even a short-term default, Steven Hess, the senior credit officer at Moody's, said earlier this month.

A default stemming from "the debt limit and the political configuration would indicate that, well, this might happen again", Hess said. "That risk is perhaps not compatible with Aaa."

Moody's said on June 2 that it would put the US credit rating under review for a downgrade unless there's progress on increasing the debt limit by mid-July.

US lawmakers are "very likely" to raise the debt ceiling limit before Aug 2, Fitch Ratings said on June 21, even as it reiterated that failure to do so would result in the country being placed on rating watch.

Obama said in a news conference on Wednesday that a default would hurt the US economy.

"The yellow light is flashing," he said. "If capital markets suddenly decide, 'You know what? The US government doesn't pay its bills, so we're going to start pulling our money out,' and the US Treasury has to start to raise interest rates in order to attract more money to pay off our bills. That means higher interest rates for businesses. That means higher interest rates for consumers."

Bloomberg News