S&P sees a 50 percent chance of downgrade for US credit rating

By Peter Schroeder - 07/14/11 08:27 PM ET

Standard & Poor's says there's a 50 percent chance it will downgrade the credit rating for U.S. debt in the next 90 days.

The credit ratings agency announced Thursday that it was preparing to downgrade the nation's debt, saying that the ongoing political standoff over raising the $14.3 trillion debt limit has increased the odds the nation's AAA credit rating will be knocked down a peg.

The agency had put the nation's debt on negative watch back in April as the debate to raise the debt limit began in earnest. Since then, actions in Washington have only made the raters more pessimistic.

"The political debate about the U.S.' fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled," the agency said. "Despite months of negotiations, the two sides remain at odds on fundamental fiscal policy issues. Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling."

If the agency believes Congress and the White House cannot reach a "credible solution to the rising U.S. government debt burden," it could lower the rating several notches, down into double-A territory. Such a move would significantly drive up borrowing costs for the federal government, and in turn roil global markets which widely treat Treasury bonds as risk-free assets.

The risk of the nation defaulting on its debt remains "small, though increasing," the agency said. But any default, no matter how short, would force the agency to drastically lower its rating.

S&P's move comes one day after Moody's Investors Service announced it had moved the nation's obligations to negative watch, citing a "rising possibility" that the debt limit will not be raised by Aug. 2 — the date after which the Treasury Department has said it will no longer be able to meet the nation's obligations without a boost.

As it had when Moody's made its move, the administration latched on the announcement to cajole lawmakers to strike a deal.

"Today’s action by S&P restates what the Obama Administration has said for some time: that Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support," said Jeffrey Goldstein, the Treasury's under secretary for domestic finance.