MercoPress. South Atlantic News Agency

S&P warns of a “one in two” chance of downgrading US debt rating

Obama and Republicans have been unable to reach a consensus on the debt ceiling

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.

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.