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BREAKING: Moody's Threatening to Downgrade US Debt

In the after market, Moody’s put US debt on review for possible downgrade - threatening to reduce the nation’s bond rating from AAA.

In a statement, Moody's said it sees 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."

The Treasury Department issued a statement in response, saying: "Moody’s assessment is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country's obligations and agree upon a substantial deficit-reduction package.”

A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the U.S. government and businesses, further harming public finances and weighing on the economic recovery.

Risks of a default on U.S. Treasurys, traditionally seen as the world's safest investment, have increased since the government reached its legal debt limit of $14.294 trillion on May 16. Congressional leaders and President Obama are locked in tense negotiations to raise the limit by Aug. 2.

The move wasn't completely unexpected: Moody's had warned in early June that a ratings review was likely in mid-July if there wasn't "meaningful progress" in discussions to raise the debt limit.

Unlike Fitch, which promised to cut the U.S. ratings to "restricted default" after a few missed debt payments, Moody's has said it would downgrade the United States to the "Aa" range, still considered investment grade.

Standard & Poor's in April placed the U.S. rating on negative outlook, which means a downgrade is likely in 12-18 months.

The U.S. Congress has routinely raised the nation's debt limit in the past. This time, however, negotiations seem to have stalled over the balance between raising taxes and cutting spending.

So far, U.S. Treasury Secretary Timothy Geithner has been able to resort to extraordinary measures to delay a debt default by at least Aug. 2.


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