Ratings agency Moody's placed the United States's triple-A debt rating on a downgrade watch because of rising prospects the US debt limit will not be raised in time to avoid default.
"The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes," Moody's said in a statement after the US financial markets closed.
"As such, there is a small but rising risk of a short-lived default," it said.
Moody's recalled that it had announced on June 2 that a rating it would be likely "in mid-July unless there was meaningful progress in negotiations to raise the debt limit."
"Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis," the agency said.
The agency insisted that even a brief delay in US payments would likely result in a lower rating.
"An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate," it said.
"However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range."
The action came as US President Barack Obama and Democratic lawmakers and their opposition Republican counterparts held a fourth straight day of talks to try to hammer out an agreement on a deficit-reduction plan.
Republicans are refusing to lift the country's $14.29 trillion debt ceiling without deep government spending cuts and reject Democrats' demand that tax increases must be part of the plan.
The stalemate in Congress is threatening to push the US into defaulting on its obligations by August 2, according to Treasury estimates.
The US hit the legal debt limit on May 16 but has since used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating without impact on government obligations.
The US Treasury Department reacted swiftly to the Moody's warning.
"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."
The head of the Federal Reserve, Ben Bernanke, earlier warned lawmakers of a "major crisis" if Congress does not raise the government's cap on borrowing before August 2.
A default "would throw shock waves into the entire global financial system," Bernanke said in semi-annual testimony Wednesday to the House of Representatives.
The dollar fell against the euro after the Moody's warning. The euro rose more than one-half US cent to $1.4216 shortly after the announcement, while the safe-haven Swiss franc also pushed sharply higher, to 0.8176 francs to one dollar.
Moody's also said it had placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks.
"We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions."
AFP