S&P Reiterates U.S. Credit Warning

Failure to raise the debt limit will "likely shove the U.S. economy back into recession."

There's a 50 percent the U.S. government's cherished AAA credit rating will be cut within three months, says Standard & Poor's in a new research note Thursday. The bond rating agency said it considered a government default the least likely scenario. But warned that failing to lift the government's debt ceiling would "likely shove the U.S. economy back into recession."

But if an immediate crisis is averted and Republicans and Democrats cut a last-minute debt deal by the August 2 deadline,  Reuters writes that absent a plan to cut government spending, there is a 50 percent chance that the U.S. would have its credit rating dropped in the next three months. "If an agreement is reached to raise the debt ceiling but nothing meaningful is done in terms of deficit reduction, the U.S. would likely have its rating cut to the AA category, S&P said." In that case, S&P spelled out exactly what they'd do:

 While banks and broker-dealers wouldn't likely suffer any immediate ratings downgrades, we would downgrade the debt of Fannie Mae, Freddie Mac, the 'AAA' rated Federal Home Loan Banks, and the 'AAA' rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating.

We would also lower the ratings on 'AAA' rated U.S. insurance groups, as per our criteria that correlates insurers' and sovereigns' ratings.

According to Reuters "The S&P's latest comments led to selling in longer-dated Treasuries, with the 30-year bond briefly falling a full point in price." The Wall Street Journal notes that the type of downgrade the S&P is  talking about is one notch to AA+.