Moody's Investors Service on Wednesday threatened to lower the United States' credit rating, saying there is a small but rising risk that the government will default on its debt.
The credit rating agency said it will review the federal government's triple-A bond rating because the White House and Congress are running out of time to raise the nation's $14.3 trillion borrowing limit and avoid a default.
The government reached its borrowing limit in May. Treasury says the government will default on its debt if the limit is not raised by Aug. 2.
A downgrade would raise interest rates on U.S. treasury bonds, increasing the interest paid by U.S. taxpayers. It would also push up rates for mortgages, car loans and other debts, which are linked to Treasury rates.
Moody's had warned in June that it would take this step if President Barack Obama and Republican lawmakers failed to make progress on an agreement by mid-July. The other credit ratings agencies, Standard & Poor's and Fitch, have said they may make similar moves.
Some Republican lawmakers have expressed skepticism that failing to raise the limit would have a major impact.
But Moody's provided a stark assessment: "An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments."
In short, that means the U.S. would lose its top rating, the agency said. Because a default would likely be short-lived, Moody's said it would likely downgrade U.S. debt to double-A. That is the second-highest of nine rankings under Moody's system.
And Moody's warned that the U.S. wouldn't regain its triple-A rating right away if lawmakers raised the borrowing limit after a short-lived default. The agency said it would leave the rating unchanged for the "near term," although it didn't say how long that would be.
Moody's has never given the U.S. government anything lower than its top rating since it began evaluating the country's debt in 1917.
Moody's acknowledged that fights over the borrowing limit have been contentious before. But it said bond interest and principal have always been paid on time.
The nation would likely retain its triple-A rating if the limit is raised before a default. But Moody's said it could assign a negative outlook on U.S. debt if lawmakers and the president fail to make major progress on a long-term plan to reduce the federal deficit.
Jeffrey A. Goldstein, a Treasury Department official, said the announcement is a "timely reminder of the need for Congress to move quickly ... and agree upon a substantial deficit reduction package."
But talks between the Obama administration and Republican leaders in Congress are at a standstill. Republicans are insisting on deep spending cuts as a condition of voting to raise the limit. Democrats want to include tax increases to help close the budget gap, a move Republicans adamantly oppose.
Obama and GOP lawmakers met for a fourth straight day Wednesday. Obama has said the daily meetings will continue until a deal is reached.
The stalemate prompted the top Republican in the Senate to propose giving Obama sweeping new powers to increase the limit to avoid default. Other Republicans criticized the idea.
"We need to get hit over the head to do the right thing," said Maya MacGuineas, president of the Committee for a Responsible Budget, a bipartisan group of experts and former members of Congress that study budget policy issues. "It's terrible it's gotten this far but it's necessary," she added, referring to Moody's review.
Robert Bixby, executive director of the Concord Coalition, which advocates for deficit reduction, said the warnings from the ratings agencies reflect concerns about U.S. politics, rather than its ability to handle large debts.
"Right now we've got these dysfunctional debt limit talks," Bixby said. "It's not surprising that an agency like Moody's would weigh in and say, `Hey guys, this is the real world.'"
AP Economics Writers Paul Wiseman and Derek Kravitz contributed to this report.