WASHINGTON (Reuters) - Moody’s Investors Service jolted White House debt talks on Wednesday with a warning that the United States may lose its top credit rating in the coming weeks, piling pressure on Washington to lift its debt ceiling.
The announcement by Moody’s, the first among the major rating agencies to place the United States’ AAA rating on review for a possible downgrade, came minutes after President Barack Obama and congressional leaders began negotiating for the fourth straight day of deficit talks.
The president and lawmakers, who met for nearly two hours on Wednesday, are trying to agree on a deal to reduce the deficit. Republicans demand steep spending cuts in return for supporting an increase in the $14.3 trillion borrowing limit.
Obama abruptly ended a tense budget meeting with Republican leaders by walking out of the room, a Republican aide familiar with the talks said.
The aide said the session was the most tense of the week as House of Representatives Speaker John Boehner, the top Republican in Congress, dismissed spending cuts offered by the White House as “gimmicks and accounting tricks.”
The Treasury says it will run out of money to pay its bills on August 2. Moody’s said it saw a “rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations.”
Potentially souring efforts to raise the debt ceiling while putting off talks about spending cuts and tax increases, Moody’s said it would likely assign a negative outlook to the nation’s gold-plated credit rating if a credible agreement with long-term deficit reduction measures were not achieved.
The move added fuel to a political fire that has seen Republicans and the White House at odds for weeks.
Republicans have insisted on steep spending cuts, while Democrats insist tax hikes for the wealthiest Americans must also be part of a deal. Republicans say they oppose any tax increases because they could hurt the economy.
“They (Moody’s) are worried they are having these ideological arguments while Rome burns. They want to say this is serious,” said Carl Kaufman, portfolio manager at Osterweis Capital Management in San Francisco.
The last time the United States was placed on review for downgrade was in 1996, by Moody’s.
As political leaders met at the White House, their representatives sparred over the meaning of Moody’s move.
“The fact that Moody’s put the United States on its watch list and may downgrade our AAA bond rating underscores the danger for those who would hold our economy and jobs hostage to a rigid ideological agenda — instead of acting in the best interests of our country,” Democratic Representative Chris Van Hollen said in a statement.
A spokesman for Boehner said the move proved the need for cutting spending.
“As Speaker Boehner has warned for months, if the White House does not take action soon to address our nation’s debt crisis by reining in spending, the markets may do it for us. This action by Moody’s today reinforces the speaker’s warning,” the spokesman said.
The Moody’s announcement unnerved traders. Contracts on the Treasury’s 30-year bond slipped half a point, pushing up yields, and the dollar slid against the yen and the euro.
“This would likely be a game-changer over the very short run, and could cause large market dislocations very quickly,” said Troy Buckner, managing principal at Nuwave International Management.
Mohamed El-Erian, co-chief investment officer of the world’s largest bond fund PIMCO, said it was an important warning.
The move also refocused the attention of investors preoccupied with company earnings and the eurozone debt crisis on the domestic political stalemate in Washington.
“What has been beginning to spook Moody’s and some other people is that Congress may be dumb enough to actually default on the debt,” said Cliff Draughn, chief investment officer at Excelsia Investment Advisors in Savannah, Georgia.
Talks have become more acrimonious in the past few days, as Republican and Democratic leaders have lashed out at each other and hardened their positions, making compromise difficult.
Underscoring the effect a potential default would have on financial markets, Federal Reserve Chairman Ben Bernanke said if Washington failed to raise the U.S. borrowing limit in time, the United States would pay creditors first and stop benefits such as payments under the Social Security retirement program.
His statement, aimed at reassuring investors that the United States would not default on its debt, stood at odds with the Obama administration, which has repeatedly played down a “Plan B” scenario if the $14.3 trillion debt ceiling was not raised.
Treasury Secretary Timothy Geithner has said paying U.S. debt alone would be unworkable, a stance Republicans consider political grandstanding.
The harsh warning to the United States that it is flirting with a downgrade highlights the serious difficulties developed nations face in reining in budgets that were stretched by the worst financial crisis and recession in 70 years.
Ratings agencies have slashed the credit standing for Ireland, Greece and Portugal to junk — essentially blocking them out of capital markets and forcing them to rely on international loans while they sort out their budgets.