Chances of ratings agency downgrade for U.S. increase

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The deadlock between the White House and Congressional leaders over increasing the U.S. debt limit is increasing the chances of a ratings agency downgrade for Washington. A money management research company raised the chances of a downgrade, placing at 40 percent the odds that Congress and the White House would not reach a deal in time for the Aug. 2 deadline to raise the debt ceiling.

Even as House Speaker John Boehner is pressuring Republicans to toe the line for a Thursday vote on his two-step bill, the Democrat-dominated Senate vows to reject the legislation and advisers of President Barack Obama hinted they will recommend its veto.

International Strategy & Investment said the ratings made by agencies are important for investors, who rely on the ratings for judgment on the bond quality. Some investors are required by their rules to purchase only high-grade bonds.

The managing director of sovereign credit ratings at Standard & Poor’s said it is not sufficient for American politicians to hike Washington’s $14.3-trillion borrowing limit, but they must also agree on a deficit reduction package to avoid a downgrade of the U.S.' AAA credit rating.

The S&P executive said the political divide that has caused the impasse will not likely be closed in the next three, six or 12 months. The agency gave a 50 percent odds forecast that Washington’s debt rating would be downgraded within the next three months unless the country’s political leaders could craft a meaningful deficit-reduction package.

According to JPMorgan Chase, a credit rating downgrade would hike Treasury rates by 60 to 70 basis points over the medium-term, which would increase the U.S.’s borrowing costs by $100 billion yearly.