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Friday, July 22, 2011 - 15:07

Update:US Sovereign Rating Vulnerable Even If Default Avoided

--Updating With Comments From Moody's Analyst
--'Credible' $4 Tln Deficit Reduction Package Wld Ensure U.S. AAA Rating

By Yali N'Diaye

WASHINGTON (MNI) - U.S. rating agencies, the financial markets,
Congress, and the Obama administration, all agree the implications of a
U.S. default would be widespread across sectors and regions worldwide.

Following a meeting with Treasury Secretary Timothy Geithner
Friday, even former Treasury Secretary Henry Paulson warned of the
"irreparable harm" if the debt ceiling is not raised in a timely manner.

Yet there is a consensus among the major rating agencies that such
a catastrophe will be avoided and an agreement will be reached to raise
the debt ceiling.

For Standard & Poor's, "the risk of a payment default on U.S.
government debt obligations as a result of not raising the debt ceiling
is small, though increasing."

Earlier this week, Fitch also reaffirmed it "continues to believe
that an agreement will be reached to raise the U.S. debt ceiling,"
adding that default is a "low" and "remote" outcome.

And Steven Hess, Moody's lead analyst for the United States, told
Market News International Monday "the most probable scenario is that the
debt limit will be raised and that the government will meet its debt

So rating agencies are already looking beyond the short term for a
"credible" budget deficit reduction plan that would allow the U.S. to
keep the highest rating on its sovereign debt once and if default is

This means the U.S. sovereign rating remains vulnerable to a
negative outcome even if default is avoided. And the strongest guard
against a rating deterioration is a "credible" medium- to long-term
budget deficit reduction.

Standard & Poor's and Moody's both agree a $4 trillion "credible"
package would lead them to affirm the U.S. AAA sovereign rating.

A $4 trillion "credible" plan "would support maintaining the Aaa
rating," Hess told MNI Friday.

But it is the crafting of this plan that is causing the political
gridlock on Capitol Hill. The latest action comes from the Senate, which
Friday defeated a House Republican plan that its authors say would have
led to $6 trillion in budget savings over a decade.

The House passed the GOP's so-called "Cut, Cap and Balance" bill
Tuesday on a 234 to 190 mostly party-line vote.

Still the government has to deliver that "credible" budget plan to
preserve its prized 'AAA' rating.

In defining what "credible" is, Standard & Poor's confirmed to MNI
what it has already affirmed in recent reports: "If Congress and the
Administration reach an agreement of about $4 trillion, and if we
conclude that such an agreement would be enacted and maintained
throughout the decade, we could, other things unchanged, affirm the
'AAA' long-term rating and A-1+ short-term ratings on the U.S."

On July 14, Standard & Poor's placed the U.S. 'AAA' long-term and
'A-1+' short-term sovereign credit ratings on CreditWatch with negative

"Owing to the dynamics of the political debate on the debt ceiling,
there is at least a one-in-two likelihood that we could lower the
long-term rating on the U.S. within the next 90 days," it said.

Congress and the Obama administration continue to ponder various
fiscal consolidation proposals, with no agreement in sight as of Friday.

"At the high end, budget savings of $4 trillion phased in over 10
to 12 years proposed by the Administration, (separately) by
Congressional leaders, as well as by the Fiscal Commission in its
December 2010 report, if accompanied by growth-enhancing reforms, could
slow the deterioration of the U.S. net general government debt-to-GDP
ratio, which is currently nearing 75%," Standard & Poor's wrote.

"Credible" is also what Fitch is looking for in any budget
proposal, projecting that the U.S. government deficit will be around 10%
of GDP this year, "the largest of any 'AAA' rated sovereign." The
debt-to-GDP ratio is expected to reach 100% next year, also the highest
in the rating peer group.

As a result, "Failure to reduce the budget deficit and stabilize
public debt would eventually erode confidence in U.S. sovereign
creditworthiness and its 'AAA' status," Fitch warned.

Thus, it continued, "A credible budget deficit reduction plan that
would place public finances on a sustainable path over the medium to
long term is necessary to underpin the 'AAA' status of the U.S. federal
government," the rating agency concluded.

Moody's is no exception and also calls for any plan to be credible.

Hess told MNI earlier this summer that "a 'credible agreement'
would be one that was going to be put into legislation, probably the
2012 budget."

He added, "It would have to show that the debt ratios would peak
sometime in the next few years and then begin to decline."

Moody's has said in the absence of a deficit reduction agreement,
it would place a negative outlook on the U.S. rating even if the debt
limit was raised.

So not only must the U.S. raise the debt ceiling and avoid default,
but authorities must also deliver on credibility when the long-term
budget deficit reduction package is presented.

This is far from being a done deal, as both sides work to deliver a
plan, any plan.

Meanwhile, at the state level, all but one state -- Minnesota --
have adopted their FY'12 budgets on time.

And abroad, euro zone leaders finally came together Thursday with a
plan offering E109 billion of official aid to Greece and marking a broad
expansion of the powers of the bailout fund, the European Financial
Stability Facility, by allowing it to buy bonds on the secondary market,
recapitalize shaky banks and lend to countries even before they find
themselves in trouble.

Standard & Poor's does not expect any impact from the Greek bailout
on the outlook for the U.S. rating, a spokesman told MNI Friday.

In the U.S., however, in yet another surprising twist in the drawn
out saga over raising the debt ceiling, Senate Majority Leader Harry
Reid Friday abruptly cancelled the Senate's weekend session and said
President Obama and House Speaker John Boehner are working aggressively
to negotiate a "major deficit reduction measure" which would also
increase the debt ceiling.

Still, U.S. House Speaker John Boehner and President Obama are
expected to be in close touch this weekend, either in person or on the
phone, as they try to assemble a package to increase the statutory debt
ceiling and cut budget deficits.

** Market News International Washington Bureau: 202-371-2121 **

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