S&P says it may downgrade the US's triple-A debt rating

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Ben Bernanke
Image caption,
US Federal Reserve chief Ben Bernanke has said a default would cause a "major crisis"

Standard & Poor's has become the latest ratings agency to issue a warning of a possible downgrade to the US's debt rating.

It said there was a "one-in-two" chance that it may cut the US's AAA rating if a deal to raise the government's debt ceiling is not agreed upon soon.

The warning comes as cross-party talks in Washington have failed to reach a consensus on the issue.

The US has until 2 August to raise government borrowing limits.

"Today's CreditWatch placement signals our view that, owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the US within the next 90 days," the agency said.

The agency added that it was concerned the talks between the government and the opposition had become "more entangled" and the two sides were not budging from their respective positions.

"Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling," S&P explained.

No-win situation

As a result of the stalemate between the parties, the government could find itself in a precarious situation.

If it finds itself unable to borrow more money, there is a likelihood that the government will not be able to make scheduled payments on Treasury bills, bonds and other securities held by investors.

S&P said that in such a scenario, the government may be forced to curtail current expenses in an attempt to avoid such a default.

It warned that such a move would have a negative impact on the US economy.

"We think that the effect on consumer sentiment, market confidence, and, thus, economic growth will likely be detrimental and long lasting," it explained.

The agency said that while cutting government spending would dent consumer confidence, a default on payments had far bigger consequences.

"If the government misses a scheduled debt payment, we believe the effect would be even more significant and, under our criteria, would result in Standard & Poor's lowering the long-term and short-term ratings on the US," it said.

Long-term solution?

The US's public debt has surged from from $10.6tn (£6.5tn) in January 2009 to $14.3tn at the end of May 2011.

Economists have warned that the world's biggest economy needs to come up with a long-term solution to contain the rising debt levels.

President Barack Obama has proposed a plan for up to $4tn in budget deficit reduction over the next 10 years, but Republicans have rejected that and other proposals because it calls for raising taxes.

On Thursday, President Obama told lawmakers he wanted an agreement on a debt deal within 24-36 hours, according to aides.

The comments came as a fifth consecutive day of cross-party negotiations failed to make a breakthrough. The president is scheduled to hold a news conference to discuss the troubled talks at 1100 (1500GMT) on Friday.

S&P warned that if the US authorities are not able to agree on a consensus plan, the issue may linger on for years to come and hurt the US economy.

"US political debate is currently more focused on the need for medium-term fiscal consolidation than it has been for a decade," it said.

"Based on this, we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years."

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