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Downgrade threat for US over stand-off on deficit cuts

Rating agency Moody’s has warned it could downgrade the US government’s credit rating if no progress is made on increasing the country’s statutory debt limit and reducing its deficit.

Last month, the US reached its debt ceiling and Congress has been at loggerheads over increasing the borrowing limit.

Last week, the Republicans blocked a bill to raise the debt limit, first demanding that the Democrats agree to spending cuts to avoid breaching the ceiling.

The US risks default if the increase is not put in place by August as it might not be able to meet its obligations. The US has a $1.5tn deficit and has $14.3tn worth of debt.

Last week, Moody’s warned the US has “a small but rising risk of a short-lived default” but added that if the debt limit is raised and default avoided, the country’s AAA rating will be maintained.

Moody’s says it anticipated the “political wrangling” over the issue but says: “The heightened polarisation over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged in coming weeks, Moody’s will place the rating under review.”

In April, rival rating agency Standard & Poor’s threatened to downgrade the US’ credit rating if it did not find a way to slash its budget deficit.

John Charcol senior technical manager Ray Boulger says: “I think a one-off downgrade would not have any impact. I do not think that anyone believes the US will default on its debt.”

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