UPDATE 1-DBRS- US AAA rating stable, lack of deficit cutting plan "worrisome"


(Adds detail) By Steven C. Johnson

NEW YORK, Oct 11 (Reuters) - DBRS reaffirmed the UnitedStates top AAA credit rating on Thursday, citing the economy'sproductivity and flexibility, but said failure to stabilize agrowing debt burden could threaten the rating in the future.

For now, the agency said the rating was stable, as the sheersize of the U.S. economy and the dollar's role as world reservecurrency allowed the government to finance its debt cheaply.

It also said the U.S. economy "remains highly productive,diversified and flexible in response to external shocks."

But the lack of a medium-term plan to reduce the deficit was"worrying," and DBRS noted that general government debt,including that of states and municipalities, is expected to hit106.7 percent of output in 2012, "well above those of otherAAA-rated countries."

Moody's Investor Service, a rival ratings agency, issued astarker warning last month, saying the country could lose itsAAA rating if budget talks in 2013 fail to produce policies thatgradually decrease the country's debt.

Standard & Poor's stripped the United States of its AAArating last year after Congress failed to agree to a long-termdeficit reduction plan and brought the country to the brink ofdefault as politicians bickered over raising the debt ceiling,the legal U.S. borrowing limit.

An immediate priority, DBRS said, was for Congress toaddress a slate of automatic spending cuts and tax increases,dubbed the "fiscal cliff," scheduled to take effect in January.

While allowing them to occur would sharply reduce thedeficit, it would likely tip the economy back into recession.The Congressional Budget Office has said it could shrink U.S.gross domestic product by 2.9 percent in the first half of nextyear and cost two million jobs.

DBRS said it expects Congress to agree to delay at leastsome, if not most, of the planned spending cuts and tax hikes.

"Whatever the policy choice, failure to establish a viablemedium-term plan to stabilize debt-to-GDP could result in anegative trend," the agency said. "Similarly, if there isanother impasse over raising the debt ceiling, this could alsoresult in downward rating pressure."

A medium-term plan would also have to include plans toaddress rising health care and retirement costs.

(Reporting by Steven C. Johnson; Editing by James Dalgleish)

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