Exclusive: Fitch to decide on U.S. ratings outlook in August (Reuters)

NEW YORK (Reuters) – Fitch Ratings said on Wednesday it will decide next month whether the United States deserves to keep a stable outlook on its AAA credit rating, after it concludes a review of the country's economic and fiscal outlook.

David Riley, Fitch's main analyst for the United States, said the decision will take into account a final budget agreement in Washington to reduce the country's deficit in the medium- to long-term.

"To some extent we are a little bit on hold because we want to see what comes out from the current negotiations," Riley told Reuters in an interview.

"As soon as an agreement is reached and has been announced, we will incorporate that into our analysis and we'll make a comment on the U.S. sovereign rating and its outlook -- hopefully by the mid of August."

(Reporting by Walter Brandimarte; Editing by Chizu Nomiyama)

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Moody's puts U.S. ratings on review for downgrade (Reuters)

NEW YORK (Reuters) – The United States may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's legal borrowing limit and the government misses debt payments, Moody's Investors Service warned on Wednesday.

Moody's is the first of the big-three credit rating agencies to place the United States' Aaa rating on review for a possible downgrade, meaning the agency is close to cutting the country's rating.

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

"They are worried they are having these ideological arguments while Rome burns," said Carl Kaufman, portfolio manager at Oster weis Capital Management in San Francisco.

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.

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."

Risks of a default on U.S. Treasuries, traditionally seen as the world's safest investment, have increased since the government reached its legal borrowing limit of $14.294 trillion on May 16.

Congress has refused to raise the statutory borrowing limit until agreement is reached on cutting the fiscal deficit which was $1.29 trillion in the last fiscal year.

The U.S. Treasury Department has said if the debt ceiling is not raised by August 2 it will have to start prioritizing payments.

DEFAULT RISK NO LONGER "DE MINIMIS"

Moody's said the probability there will be a default on interest payments is low, but it is "no longer to be de minimis."

"If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed," Moody's said.

"However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction," the firm said.

There is precedent for Moody's decision. In 1996 the firm put some issues of U.S. Treasury debt on watch for a downgrade when the White House and Congress failed to extend the government's debt ceiling.

Moody's decision came after U.S. markets had closed on Wednesday but before Asian markets ramped up their activity. In the 24-hour currency markets the U.S. dollar index, which measures the greenback against a basket of trading partner currencies, had fallen earlier in the session and ended down 1.1 percent, marking the steepest one-day decline since early December.

"In the short-term, the dollar definitely has its problems. This ratings news sent the dollar tumbling. This is really not good," said Brian Dolan, chief strategist at Forex.com of Bedminster, New Jersey.

"Moody's might be doing this based on the politics as much as the threat of default, because the politics have become so problematic.... Between this and (Ben) Bernanke talking about QE3, the dollar could be entering a new downward phase," he said.

The U.S. dollar fell on Wednesday after U.S. Federal Reserve Chairman Ben Bernanke said the central bank could inject more monetary stimulus into the U.S. economy.

The currency fell to a record low against the Swiss franc. The greenback hit a trough of 0.8095 franc, on electronic trading platform EBS.

In after-hours trade, U.S. stock futures dropped 4.8 points to 1307.20 following Moody's decision.

COLLATERAL IMPACT

In addition, the credit ratings for institutions directly linked to the U.S. government were also put on review for a possible downgrade, including Fannie Mae, Freddie Mac, the Federal Home Loan banks and the Federal Farm Credit banks.

The ramifications of a U.S. downgrade could also be felt in places such as Israel and Egypt.

Moody's says the specific bonds issued by these two governments which carry a U.S. government guarantee "were also placed on review for possible downgrade." Israel and Egypt issue bonds without Washington's guarantee, and presumably they would not be subject to the current situation.

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 degree to which the fiscal deficit should be cut by raising taxes or 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 August 2.

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.

(Reporting by Walter Brandimarte and Daniel Bases; Editing by Leslie Adler and Clive McKeef)

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EU slams ratings agencies after Portugal downgraded (Reuters)

STRASBOURG, France/BERLIN (Reuters) – European politicians accused credit rating agencies on Wednesday of anti-European bias after Moody's downgrade of Portugal's debt to "junk" cast new doubt on EU efforts to rescue distressed euro zone states without debt restructuring.

European Commission President Jose Manuel Barroso said the decision to cut Lisbon's rating by four notches so soon after it became the third country to receive an EU/IMF bailout was fuelling speculation in financial markets.

The cost of insuring all weaker euro zone states' debt against default rose after Moody's announced the downgrade on Tuesday.

The euro and European shares fell, ending a seven-day stocks rally, and Portugal had to pay more to sell three-month T-bills on Wednesday.

"It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe," Barroso told reporters in the European Parliament.

German Finance Minister Wolfgang Schaeuble called for limits to be placed on the rating agencies' "oligopoly."

Of the three major agencies, Moody's and Standard & Poor's are U.S.-owned and based. Fitch Ratings is headquartered in New York and London and majority-owned by a French company.

The European Union's executive body is drafting proposals to regulate rating agencies; there has been political talk, but no action so far, about creating a European agency.

Michel Barnier, the EU official in charge of regulation, said later he could examine how to suspend the rating of countries that are getting bailout funds from the EU and International Monetary Fund. These are Greece, Ireland and Portugal.

Moody's thumbs-down, coming so soon after a new center-right Lisbon government announced austerity plans going beyond international lenders' demands, called into question the EU strategy for dealing with the euro zone sovereign debt crisis.

Moody's said Portugal may need a second round of rescue funds before it can return to capital markets, just as European governments and banks are haggling over a second 120 billion euro ($172 billion) bailout for Greece, which has a much higher debt ratio.

"The key worry of the market is that the events that we've been seeing with Greece are being repeated with Portugal," said WestLB rate strategist Michael Leister.

IRELAND TOO?

Ireland, the other euro zone country to have received a bailout, said on Tuesday it may have to make additional spending cuts next year to meet deficit reduction targets in its 85 billion euro bailout plan due to an economic slowdown.

A Reuters analysis last week found that Dublin may also need a second bailout because it is unlikely to grow fast enough to make the envisaged full return to market funding in 2013.

Moody's cited the EU's crisis management, and specifically the attempt to make private creditors share the burden of all future rescues, as one reason for its steep downgrade.

The demand that banks and insurers share the risk is driven by growing public hostility in north European creditor nations to any further bailouts for south European states seen as having lived beyond their means.

But Moody's said insisting on private sector involvement not only increased the economic risk facing current investors, but also "may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.

BANKERS FACE OBSTACLE COURSE

Representatives of Greece's major creditor banks met in Paris under the aegis of the International Institute of Finance(IIF), a banking lobby, to discuss a proposed rollover of privately held Greek debt, but there was no sign of agreement.

Banking sources said numerous issues involving credit ratings, interest rates, maturities and accounting consequences remained to be ironed out among multiple stakeholders and an agreement was only likely in September.

Rating agencies have warned they would be likely to treat any "voluntary" rollover of Greek bonds as a distressed debt exchange and declare it, at least temporarily, to be a selective default.

French banks have offered a plan under which banks would roll over about half of Greek debt that matures in 2011-14, putting another 20 percent into a "guarantee fund" of zero-coupon AAA bonds, and cashing out the remaining 30 percent.

German Deputy Finance Minister Joerg Asmussen put Berlin's alternative proposal for a debt swap extending existing bonds' maturities by seven years back on the table on Wednesday, even though the European Central Bank has warned against it.

Asmussen also told Reuters Insider TV it was "absolutely premature" to discuss a second rescue package for Portugal, and Berlin was confident the country could implement its reforms and get back on track.

"There is a new government in place so I would really suggest giving the government the time to do what the new government has promised," he said.

"We are confident they are willing and able to implement the first package and get back on track," he said.

France's new finance minister, Francois Baroin, was just as dismissive of Moody's action on Portugal.

"A ratings agency's view is not going to solve the matter of tension on sovereign debt markets and the budgetary crisis," he said, adding he trusted Portugal's new government to meet its deficit reduction target by 2013.

SELF-FULFILLING?

EU officials complain that the ratings agencies' downgrades are a self-fulfilling prophecy, making it harder for countries under assistance programs to return to capital markets.

Underlying the debate is an increasingly prevalent view in financial markets -- disputed publicly by EU governments -- that Greece, and possibly also Portugal and Ireland, will have to restructure debt sooner or later and force significant losses on bondholders.

The more widespread that assumption becomes, the harder it will be to negotiate further official funding for Greece.

The International Monetary Fund board is expected to approve on Friday the release of a vitally needed fresh tranche of loans for Greece after euro zone finance ministers agreed on Saturday to pay their share.

The IMF's new managing director, former French Finance Minister Christine Lagarde, warned the crisis could be comparable to the collapse of Lehman Brothers nearly three years ago unless action is taken to stave off a Greek default.

"I have very, very clear recollections of the first days of September 2008 and the last days. ... Some people at the beginning of the month thought, 'Not a big deal, it's OK, it will teach those guys a lesson.' The end of the month was not quite on the same page," she told reporters in Washington.

But IMF sources say disquiet is growing among non-Europeans at the global lender over the risks of pouring more money into Europe's debt crisis with no resolution in sight.

"It goes to show that this whole crisis isn't over just yet. Even if they cough up some more money for Greece, and that looks like it's a done deal, it's not over," said Jay Bryson, global economist at Wells Fargo Securities.

"I would think it's bad news for Spain and Italy as well."

(Additional reporting by Ana Nicolai da Costa, Naomi Tajitsu and Alex Chambers in London, Walter Brandimarte in New York, Eva Kuehnen, Annika Breidthardt and Gernot Heller in Berlin, Leigh Thomas in Paris and Pedro da Costa in Washington; writing by Paul Taylor, editing by Jon Boyle and Leslie Adler)

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Exclusive: S&P to deeply cut U.S. ratings if debt payment missed (Reuters)

NEW YORK (Reuters) – The United States would immediately have its top-notch credit rating slashed to "selective default" if it misses a debt payment on August 4, Standard & Poor's managing director John Chambers told Reuters.

Chambers, who is also the chairman of S&P's sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated 'D' if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.

"If the U.S. government misses a payment, it goes to D," Chambers said. "That would happen right after August 4, when the bills mature, because they don't have a grace period."

Fears of a technical default have been rising after budget negotiations between Democrats and Republicans fell apart in Washington earlier this week. Even a brief default by the United States would immediately increase the country's borrowing costs, weighing on the fragile economic recovery and eroding the dollar's status as a reserve currency.

On August 4, the Treasury Department is due to pay off $30 billion in maturing short-term debt.

With the debt talks stalled, new ideas are surfacing such as prioritizing debt payments. But Treasury Secretary Timothy Geithner warned lawmakers on Wednesday that such a move would still cause investors to shun U.S. Treasury securities.

Geithner said that because the United States now borrows roughly 40 cents of every dollar it spends, prioritizing payments with no debt limit increase would require cutting 40 percent of all government expenditures.

S&P is not the first agency to say it will downgrade the United States if a payment is missed. Rival credit rater Moody's on June 2 was the first to say it would downgrade the United States shortly after a possible ceiling-related default, but not as deeply -- to the Aa range.

Chambers insisted that the likelihood of a U.S. default is "extremely low," as S&P expects a last-minute increase to the country's debt ceiling just like it has happened for more than 70 times since the 1960s.

He also noted a default on U.S. Treasuries -- a benchmark against which all other debt is measured -- would dwarf any worries about U.S. credit ratings as global markets would crumble.

Chambers made clear, however, that S&P is more worried about the ability of the U.S. government to meaningfully cut its deficit over the next two years, with presidential elections in 2012 making a bipartisan agreement much tougher.

S&P is so far the only of the big-three credit ratings agencies to revise the outlook on the U.S. AAA credit rating to negative. It has said it sees a one-in-three chance of a downgrade within the next two years.

Moody's Investors Service and Fitch Ratings have expressed concern about the pace of budget negotiations in Washington, but still maintain a stable outlook on U.S. ratings.

Yet they have been more vocal about the risks of a "technical default" in August. Fitch said earlier this month it would cut U.S. issuer ratings to "restricted default" if the government misses a more substantial debt payment on August 15.

The U.S. Treasury reached the country's $14.3 trillion debt limit on May 16 and has been making use of extraordinary measures to keep servicing its debt since then. It will run out of alternatives to avoid a default on August 2, Geithner has said.

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