The United States is at risk of losing its top-notch credit rating soon if a standoff in Congress over raising the US debt ceiling prevents the government from honoring its debt payments in early August.
The warning by Moody's Investors Service on Wednesday represented the biggest danger to date for the AAA rating of the United States, whose debt provides the bedrock of the world's financial system.
Below are some questions and answers on how the ratings process works and why it is so important:
Q-What does Moody's move today mean?
A-The agency has launched a review process that may result in a downgrade of US ratings in the next few weeks, adding pressure on Republicans and the White House to solve the debt problem.
Q-How is it different from what Standard & Poor's did in April?
A-Rival ratings agency S&P in April revised its outlook on the US credit rating to negative, saying lawmakers may not reach an agreement to cut the nation's deficit meaningfully by 2013. The negative outlook means a downgrade is likely in 12-18 months.
Q-If a US default is avoided, is that the end of the debt crisis?
A-Even if the United States manages to avoid a short, technical default in August, Moody's may still follow S&P and revise the rating outlook to negative on longer-term debt concerns. Again, that would mean a downgrade is likely in 12-18 months and heap pressure on Washington to deal with the fiscal problems that underpin the debt ceiling row.
Q-How could the United States turn the tide and get better news from the ratings agencies?
A-All three ratings agencies have taken pains to explain that raising the debt ceiling and avoiding a default does not solve the long-term fiscal deficit problem of the US government. Only an agreement that puts Washington on a path of deficit reduction and lowers the debt-to-GDP (gross domestic product) ratio will ultimately keep the world's largest economy from suffering a downgrade. Such a deal may have to include cuts to sacred cows such as welfare or social security programs and higher taxes.
Q-What effect does all this have on investors?
A-Investors have so far not priced in the possibility of a default and US Treasury yields remain near historic lows, meaning they are buying, not selling. But yields are likely to jump higher if there is no deal ahead of the Aug. 2 deadline -- the date the Treasury has said it will run out of money to pay its obligations. That would put at risk the already slow recovery of the US economy.
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