Moody's Investors Service on Wednesday threatened to lower the United States' credit rating, saying there is a small but rising risk that the government will default on its debt.
The credit rating agency said it will review the federal government's triple-A bond rating because the White House and Congress are running out of time to raise the nation's $14.3 trillion borrowing limit and avoid a default.
The government reached its borrowing limit in May. Treasury says the government will default on its debt if the limit is not raised by Aug. 2.
A downgrade would raise interest rates on U.S. treasury bonds, increasing the interest paid by U.S. taxpayers. It would also push up rates for mortgages, car loans and other debts, which are linked to Treasury rates.
Moody's had warned in June that it would take this step if President Barack Obama and Republican lawmakers failed to make progress on an agreement by mid-July. The other credit ratings agencies, Standard & Poor's and Fitch, have said they may make similar moves.
Some Republican lawmakers have expressed skepticism that failing to raise the limit would have a major impact.
But Moody's provided a stark assessment: "An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments."
In short, that means the U.S. would lose its top rating, the agency said. Moody's said it would likely downgrade U.S. debt to double-A.
Moody's has never given the U.S. government anything lower than its top rating since it began evaluating the country's debt in 1917.
Moody's acknowledged that fights over the borrowing limit have been contentious before. But it said bond interest and principal have always been paid on time.
The nation would likely retain its triple-A rating if the limit is raised. But Moody's said it could assign a negative outlook on U.S. debt if lawmakers and the president fail to make major progress on a long-term plan to reduce the federal deficit.
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