US President Barack Obama and Republicans prepared for more tough talks yesterday to avert a debt default next month, after Moody’s held out the threat of downgrading the US’ credit rating.
Asian markets mostly fell and the US dollar faced heavy selling yesterday after Moody’s warned it could downgrade the US’ triple-A debt rating, raising fears of a default by Washington.
Tokyo shed 0.3 percent to end at 9,936.12, with exporters hurt by the yen’s strength against the greenback, and Sydney closed 0.5 percent lower at 4,490.7.
Hong Kong lost 0.3 percent at 21,868.52. Seoul was flat, edging up 0.43 points to close at 2,130.07, but Shanghai gained 0.18 percent.
“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.
Chinese credit ratings agency Dagong International Credit Rating (大公國際信評) said it had also put US sovereign debt on negative watch for a possible downgrade, citing weak US economic growth and the likelihood that fiscal deficits would remain high.
“Various factors that affect the repayment ability of the US federal government will keep deteriorating,” it said in a statement. “Dagong will downgrade the US sovereign ratings if there is no substantive improvement in its repayment ability and willingness within the period of observation.”
China yesterday urged the US to protect the interests of investors.
China is by far the top holder of US debt, with holdings at US$1.153 trillion in April according to US data, and the foreign ministry urged the US government to “adopt responsible policy and measures to ensure the interests of investors.”
US Federal Reserve Chairman Ben Bernanke said on Wednesday that a default would plunge the economy into “major crisis,” risking a second recession and “throw shock waves through the entire global financial system.”
He told the House Financial Services Committee that the US could keep making payments on debt principal and interest absent an increase in the congressionally set debt ceiling — but at a crippling cost.
The cash-strapped US government would have to slash domestic spending by as much as 40 percent, which could bring fragile economic growth to a standstill at a time when unemployment stands at a historically high 9.2 percent.
Bernanke sounded the alarm as Obama was to welcome his political opponents and his fellow Democrats for a fifth straight day of seemingly stalled talks yesterday with an Aug. 2 deadline just three weeks away. The US president planned to take stock of the apparent stalemate today, a Democratic aide said.
“Friday is not a hard deadline,” the aide told reporters after the contentious discussions wrapped up their fourth day, but “the clock is ticking, they have to get this done.”
Obama needs the Republican-led House of Representatives and Democratic-held Senate to sign off on a deal to close the yawning US deficit while allowing cash-strapped Washington to borrow past an Aug. 2 deadline.
The US hit the ceiling on May 16 and has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating without impact on government obligations.
However, by Aug. 2, the government will have to begin withholding payments to bond holders, civil servants, retirees or government contractors.
Obama has called for cuts to social safety net programs dear to Democrats while pushing for tax hikes on the rich, a step rejected by Republicans who charge doing so will smother investment and crush already weak job growth.
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