S&P Warns of Higher Risk of US Credit Rating Downgrade

The risks of the U.S. losing its prized triple-A rating over the medium term have increased as the country faces a political impasse and nears its debt ceiling, Standard and Poor's said on Tuesday.

While the ability to adapt both fiscal and monetary policy was a positive for the United States, the risk of a credit rating downgrade had increased due to a lack of political consensus on how to employ that flexibility, Moritz Kraemer, head of sovereign credit ratings for Europe at Standard & Poor's, said on Tuesday.

"The problem is this flexibility needs to be employed and for that you need political consensus. That's not very visible right now," he said.

The United States is expected to exhaust its ability to meet financial obligations by August 2, but the Treasury department has said that date could shift.

"The downside risks in the medium term have increased and we did assign a negative outlook that signifies there's a one in three chance the rating might go down in the next few years," Kraemer told a Euromoney bond conference in London.

Standard & Poor's threatened in April to downgrade the United States' AAA credit rating unless the Obama administration and Congress find a way to slash the yawning federal budget deficit within two years.

Earlier on Tuesday, Fitch ratings said it saw risks of a debt default in the United States, whose top-rated bonds may suffer if the country doesn't lift its fiscal borrowing ceiling.

IMF economist Paul Mills also took a negative line on the politics surrounding the U.S. debt situation, speaking at the conference.

"I don't think the debate has yet even begun to understand how big a fiscal retrenchment is going to be needed," Mills said.

"The parameters of debate are still in the foothills of the problem... we may well see an initial plaster applied until the presidential election then a more fundamental solution after that."

ESM CREDITOR STATUS

Kraemer said a move to drop preferred credit status for the European Stability Mechanism — the region's permanent safety net due to come into effect mid-2013 — would help Portugal and Ireland in their efforts to rebuild investor confidence.

Euro zone finance ministers decided on Monday that the regions' permanent bailout fund will not have preferred creditor status if it lends to Greece, Ireland or Portugal, but would get paid back first in other cases.

Kraemer also said there was little progress in resolving Greece's debt crisis after a weekend meeting of EU finance ministers deferred a decision to give Athens funding to avoid defaulting next month.

All but one of the 400 participants at the panel discussion — including fund managers, market strategists and economists — thought Greece would avoid another debt restructure even if it secured a new aid package as expected by next month.

Mills said that even though markets had a broad idea of banks' exposure to Greek sovereign bonds, the risks of a widespread impact on interbank funding markets remained high.

"The concern is the reputational risk to bank funding markets, which will, I think, be the bigger channel (for contagion pressure)," Mills said.

"Peripheral banks are well behind the pace on the debt they plan to issue this year and so that's increasing the pressure in Spain, Portugal and Ireland."