CREDIT RATINGS agency Moody’s has warned of a “very small but rising risk” that the US could default on its debt, adding to pressure on congress and the Obama administration to overcome severe political divisions and strike a deal on fiscal policy.

The report from Moody’s follows a move in April by Standard Poor’s to change the outlook on America’s vaunted triple-A credit score from “stable” to “negative” because of the lack of a political consensus on deficit reduction.

The starkest message from Moody’s was that if politicians in Washington did not make progress on raising the country’s $14,300 billion borrowing limit in the next few weeks, it could put the US rating on review for a possible downgrade.

The treasury department has warned that if the country’s debt ceiling is not raised by August 2nd, the US will exhaust its capacity to pay its bills.

Republicans however are demanding deep spending cuts and budget reforms in exchange for greater borrowing authority, and negotiations to reach an agreement between the feuding sides are only advancing slowly.

“Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations,” the report, whose lead author is analyst Steven Hess, said.

“The heightened polarisation over the debt limit has increased the odds of a short-lived default.

“Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July, such a rating action is likely.”

Moody’s said that if the debt ceiling was increased, America’s triple-A rating would be maintained.

Ultimately however, the fate of the US credit outlook will be linked to what kind of substantive deal on long-term fiscal reform Republicans and Democrats are able to reach. – Copyright The Financial Times Limited 2011