US gets warning it may lose best debt rating

Moody\'s placed US debt on a downgrade watch, citing prospects that talks may not reach a deal in time to avert an early August default and "prevent a missed payment of interest or principal on outstanding bonds and notes."

"Moody\'s considers the probability of a default on interest payments to be low but no longer to be de minimis," the agency said as President Barack Obama held contentious talks with his Republican foes for a fourth straight day.

The US Treasury Department quickly responded that the warning to the world\'s richest nation was "a timely reminder" of the need for "a substantial deficit reduction package."

With all sides seemingly digging in, US central bank chief Ben Bernanke warned a US default could spark a "major crisis" in the world economy absent a deal to cut spending while enabling cash-strapped Washington to borrow more.

"Clearly, if we went so far as to default on the debt, it would be a major crisis," that would "throw shockwaves through the entire global financial system," the US Federal Reserve chairman told a key congressional committee.

Obama has been pressing Republicans and his fellow Democrats to help forge an accord to raise the $14.3 trillion US debt limit while cutting spending, with his call to raise taxes on the rich a dealbreaker for Republicans.

The Fed chief told lawmakers that failure to reach a deal by an August 2 deadline could "throw the financial system into enormous disarray and have major impacts on the global economy" if Washington halts debt payments.

Bernanke told the House Financial Services Committee that the United States 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 said Washington would have to make "fairly significant cuts" to cherished programs like Medicare health insurance for the elderly and disabled, Social Security retirement payments, and possibly military pay.

And "it\'s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us," adding to the deficit and raising US debt payments, he cautioned.

US Treasury Secretary Tim Geithner, who has predicted catastrophe in the event of a default, was expected to lunch with Senate Democrats on Thursday.

Republican Senate Minority Leader Mitch McConnell, who unveiled a surprise plan Tuesday that would effectively let Obama raise the debt ceiling with just Democratic support and without cutting spending, renewed his call for a balanced budget amendment to the US Constitution.

"We\'ve tried persuasion, we\'ve tried negotiations, we\'ve tried elections, nothing has worked," he said. "The constitution must be amended to keep the government in check."

Republican House Speaker John Boehner said the lower chamber would vote on the measure next week.

But White House spokesman Jay Carney said the proposal was "about ducking responsibility rather than taking our challenges head-on" and declared: "The Constitution should not be used to simply abdicate responsibility."

Republicans have embraced fiscal discipline since Obama took office, after years in which they backed massive tax cuts and rejected paying for wars in Afghanistan and Iraq or a costly increase in a popular health care program.

Leading Democrats and the White House greeted McConnell\'s proposal carefully, but it was unclear whether the plan would rally enough Republican support to pass the divided US Congress.

Obama has called for daily talks to reach a deal to lift the US debt ceiling, now at $14.29 trillion, in the face of a budget deficit expected to hit $1.6 trillion this year.

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.

But by August 2, the government will have to begin withholding payments to bond holders, civil servants, retirees or government contractors.

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