July 27, 2011 / 2:32 AM / 6 years ago

S&P warns against prioritizing debt payments: report

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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