S&P looking for $4 trillion in deficit reduction to avoid downgrade. [View All]

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By DAMIAN PALETTA

POLITICS JULY 22, 2011, 9:30 P.M. ET
Small-Scale Deficit Deal Increases Risk of U.S. Downgrade


WASHINGTON—The breakdown in deficit-reduction talks between the White House and Speaker of the House John Boehner (R., Ohio) could immediately increase the risk that Standard & Poor's takes the unprecedented step of lowering its top-notch rating of U.S. government debt.

The credit-rating firm has warned repeatedly that it could move to downgrade U.S. debt if it believes any deficit-reduction deal isn't robust enough to change the country's trajectory of future debt growth. A downgrade could come even if officials agree to raise the federal debt ceiling by Aug. 2. Treasury Department officials have set that as the deadline because after that date, without more borrowing authority, the government could run out of cash to pay all its bills.

Messrs. Obama and Boehner had been trying to package a deal that would reduce future federal deficits by $4 trillion over 10 years, a level S&P officials had suggested would be sufficient to avoid a downgrade. A lower credit rating would raise borrowing costs not just for the government, but also for consumers and businesses, which could slow U.S. economic growth. It also could lower the value of Treasury securities held as assets by banks, pension funds, mutual funds, hedge funds, and other investors around the world, potentially shaking financial markets.

Now that the large-scale talks have broken down, policy makers will likely pursue a smaller-scale deal that falls short of S&P's targets. Mr. Obama alluded to this possibility Friday evening.

"If we can't come up with a serious plan for actual deficit and debt reduction, and all we're doing is extending the debt ceiling for another six, seven, eight months, then the probabilities of downgrading U.S. credit are increased, and that will be an additional cloud over the economy and make it more difficult for us and more difficult for businesses to create jobs that the American people so desperately need," Mr. Obama said Friday evening.

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