June 29 (Bloomberg) -- Standard & Poor’s would cut the U.S. sovereign rating to D, the lowest on its scale, in the event of a default after a failure to raise the debt limit, according to John Chambers, chairman of the sovereign rating committee.
The U.S. credit grade following even a short-lived default after which the government resumed making debt payments would be determined by the company’s sovereign rating committee and would “be dependent on facts on the ground,” Chambers said, noting that would be standard policy for the company. Republicans are using talks to increase the $14.3 trillion debt ceiling to press for cuts in spending.
“We believe the debt ceiling will be raised and the government won’t default, otherwise we wouldn’t have a AAA rating on the U.S. government,” Chambers said in a telephone interview from New York. “It’s evolving as we expected.”
Derivatives traders are demanding higher prices to insure Treasuries against default as the standoff between Congress and the Obama administration drags on.
The costs for insuring against default for one year have risen to 51 basis points as of June 28 from 24 basis points on May 16, when the U.S. reached its borrowing limit, according to index administrator Markit Group Ltd. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
The U.S. would risk not winning back its top Aaa credit rating soon if the nation’s debt limit causes even a short-term default, Moody’s Investors Service’s senior credit officer said in an interview this month.
A default stemming from “the debt limit and the political configuration would indicate that, well, this might happen again,” according to Moody’s Steve Hess. “That risk is perhaps not compatible with Aaa,” Hess said at Bloomberg headquarters in New York on June 21.
S&P put the U.S. government on notice in April that it risks losing its top AAA rating unless policy makers agree on and implement a plan by 2013 to reduce budget deficits and the national debt.
Reuters reported earlier today that the S&P would “deeply cut” the U.S. credit grade if the government missed a debt payment.
--Editors: Paul Cox, Greg Storey
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