S&P warns against prioritizing debt payments: report

NEW YORK Tue Jul 26, 2011 10:31pm EDT

NEW YORK (Reuters) - Prioritizing debt payments to avoid a default would be "deeply disruptive" to the economy, Standard & Poor's global head of sovereign ratings said in an interview with CNBC on Tuesday.

David Beers' warning comes as Republican and Democratic leaders scramble to agree on a plan to raise the U.S. debt ceiling before the Treasury runs out of cash to service its obligations on August 2.

Beers said the Treasury could "theoretically" prioritize debt payments over other government obligations for some time while negotiations continue in Washington.

"But it's worth remembering what that would mean -- it would mean a very sudden fiscal shock that the longer it lasted would filter powerfully through the system," Beers said.

"Potentially that would be deeply disruptive to the economy."

Beers also said that a small increase in the U.S. debt ceiling would be negative to U.S. ratings.

"We would be concerned if we thought that the debt ceiling debate would come back and we'd have to go through all this again and again and again," he said. "That would be a negative."

U.S. House Speaker John Boehner, a Republican, and Senate Democratic Leader Harry Reid are pushing rival plans to raise the government's borrowing limit before the deadline.

Boehner is advocating a two-stage strategy that would require Congress to raise the debt limit once by August 2, and then again early next year.

President Barack Obama opposes it because it would raise the debt limit for only a few months, something he has said he will not agree to.

S&P on July 14 put U.S. ratings on credit watch negative, saying it may downgrade the country's AAA credit rating in the next three months if lawmakers fail to come up with a plan to cut the country's deficit.

Beers said S&P will judge a plan when it comes, but added that it wants to make sure the plan will be implemented before deciding on the ratings.

(Reporting by Jennifer Saba and Walter Brandimarte; Editing by Sandra Maler)

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Comments (5)
txgadfly wrote:
Well we would be better off with a military dictatorship than letting these unresponsive civilians start and wage wars. And the interest the Government has in the opinions of the peasants would honest if not different.

There will not be a dime left in this country if we do not bust up the military and take away the resources to fight a war of aggression. They will fight to your last dime. Believe it. The USA has not won a war since WW2.

Jul 26, 2011 11:15pm EDT  --  Report as abuse
J1simple wrote:
You mean the company that missed the real estate bubble, CDOs, and the subsequent collapse? That effective, insightful company? Oh, then we should immediately pay close attention to Irrelevant Inc. aka S&P.

Jul 26, 2011 11:17pm EDT  --  Report as abuse
beofaction wrote:
So, let me get this straight. S&P thinks it’s okay for the Federal Government to operate a Ponzi scheme using debt, continuously spend more than they receive in revenue – building a debt of over $14 trillion, and have the Federal Reserve buy some of the government’s own debt. That behavior earns us a AAA rating, but now that some in Congress are finally recoginizing the seriousness of our situation and balking at raising the government’s credit limit, S&P wants to reduce the government’s credit rating? Now? Really? Gee, I wish my credit rating worked the same way!!!!

Jul 26, 2011 11:41pm EDT  --  Report as abuse
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