By Yali N’Diaye

WASHINGTON (MNI) – U.S. rating agencies, the financial markets,
Congress, and the Obama administration, all agree the implications of a
U.S. default would be widespread across sectors and regions worldwide.

Following a meeting with Treasury Secretary Timothy Geithner
Friday, even former Treasury Secretary Henry Paulson warned of the
“irreparable harm” if the debt ceiling is not raised in a timely manner.

Yet there is a consensus among the major rating agencies that such
a catastrophe will be avoided and an agreement will be reached to raise
the debt ceiling.

For Standard & Poor’s, “the risk of a payment default on U.S.
government debt obligations as a result of not raising the debt ceiling
is small, though increasing.”

Earlier this week, Fitch also reaffirmed it “continues to believe
that an agreement will be reached to raise the U.S. debt ceiling,”
adding that default is a “low” and “remote” outcome.

And Steven Hess, Moody’s lead analyst for the United States, told
Market News International Monday “the most probable scenario is that the
debt limit will be raised and that the government will meet its debt
obligations.”

So rating agencies are already looking beyond the short term for a
“credible” budget deficit reduction plan that would allow the U.S. to
keep the highest rating on its sovereign debt once and if default is
avoided.”

This means the U.S. sovereign rating remains vulnerable to a
negative outcome even if default is avoided. And the strongest guard
against a rating deterioration is a “credible” medium- to long-term
budget deficit reduction.

But it is the crafting of this plan that is causing the political
gridlock on Capitol Hill. The latest action comes from the Senate, which
Friday defeated a House Republican plan that its authors say would have
led to $6 trillion in budget savings over a decade.

The House passed the GOP’s so-called “Cut, Cap and Balance” bill
Tuesday on a 234 to 190 mostly party-line vote.

Still the government has to deliver that “credible” budget plan to
preserve its prized ‘AAA’ rating.

In defining what “credible” is, Standard & Poor’s confirmed to MNI
what it has already affirmed in recent reports: “If Congress and the
Administration reach an agreement of about $4 trillion, and if we
conclude that such an agreement would be enacted and maintained
throughout the decade, we could, other things unchanged, affirm the
‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.”

On July 14, Standard & Poor’s placed the U.S. ‘AAA’ long-term and
‘A-1+’ short-term sovereign credit ratings on CreditWatch with negative
implications.

“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 U.S. within the next 90 days,” it said.

Congress and the Obama administration continue to ponder various
fiscal consolidation proposals, with no agreement in sight as of Friday.

“At the high end, budget savings of $4 trillion phased in over 10
to 12 years proposed by the Administration, (separately) by
Congressional leaders, as well as by the Fiscal Commission in its
December 2010 report, if accompanied by growth-enhancing reforms, could
slow the deterioration of the U.S. net general government debt-to-GDP
ratio, which is currently nearing 75%,” Standard & Poor’s wrote.

“Credible” is also what Fitch is looking for in any budget
proposal, projecting that the U.S. government deficit will be around 10%
of GDP this year, “the largest of any ‘AAA’ rated sovereign.” The
debt-to-GDP ratio is expected to reach 100% next year, also the highest
in the rating peer group.

As a result, “Failure to reduce the budget deficit and stabilize
public debt would eventually erode confidence in U.S. sovereign
creditworthiness and its ‘AAA’ status,” Fitch warned.

Thus, it continued, “A credible budget deficit reduction plan that
would place public finances on a sustainable path over the medium to
long term is necessary to underpin the ‘AAA’ status of the U.S. federal
government,” the rating agency concluded.

Moody’s is no exception and also calls for any plan to be credible.

Hess told MNI earlier this summer that “a ‘credible agreement’
would be one that was going to be put into legislation, probably the
2012 budget.”

He added, “It would have to show that the debt ratios would peak
sometime in the next few years and then begin to decline.”

Moody’s has said in the absence of a deficit reduction agreement,
it would place a negative outlook on the U.S. rating even if the debt
limit was raised.

So not only must the U.S. raise the debt ceiling and avoid default,
authorities must also deliver on credibility when the long-term budget
deficit reduction package is presented.

This is far from being a done deal, as both sides work to deliver a
plan, any plan.

And in yet another surprising twist in the drawn out saga over
raising the debt ceiling, Senate Majority Leader Harry Reid Friday
abruptly cancelled the Senate’s weekend session and said President Obama
and House Speaker John Boehner are working aggressively to negotiate a
“major deficit reduction measure” which would also increase the debt
ceiling.

“Moody’s and S&P came out with their statements when there was no
progress on U.S. debt or Greece issues,” one veteran trader said, “but
that has changed in the last couple of days.”

** Market News International Washington Bureau: 202-371-2121 **

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