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WASHINGTON: For the first time, a top credit ratings agency has seriously hinted the United States might be forced to welch on its debts, a warning experts say could herald dramatic changes for the country and the world.
In the world of credit a "AAA" rating is a gold star of approval. Those countries and businesses that have it can borrow extraordinarily cheaply, those who don't, can't.
So when ratings agency Standard & Poor's on Monday warned the United States has a one-in-three chance of losing its gold star in the next two years, it came as a bit of a shock to the system.
The announcement was "like a gas explosion in a mine," according to Gregori Volokhine, an analyst at Meeschaert Capital Markets.
The impact was immediately seen on stock, bond and currency markets, but the most profound impact may have been to make the unthinkable - a US downgrade - not only thinkable, but likely.
"If two years from now we have not done anything, and we've added another $2.5 trillion to the debt, it will no longer be a one in three chance," said Steven Ricchiuto, chief economist at Mizuho Securities US.
"The probabilities of this are on an increasing scale," he said, pointing blame directly at politicians in Washington who have tangled on the issue and who at times seem unable to agree on the date.
If the shock from S&P's warning has been profound that is because Ricchiuto and other experts believe the impact of a downgrade would also be profound.
"You would do serious damage to the (dollar's) reserve currency status," said Ricchiuto, pointing to a world where the US currency no longer dominates.
Once described as an "exorbitant privilege," the dollar's status nets the United States around $40-70 billion each year according to one 2009 study by McKinsey, a consulting group.
US assets are made more attractive to foreign lenders because they are priced in stable and always-in-demand dollars.
That high demand translates into cheap lending for the US government, households and businesses.
For households a downgrade would spell higher mortgage rates, hitting an already dire housing market, according to Inna Mufteeva an economist with Natixis.
Companies meanwhile "would see the cost of financing mount, which would hamper the productive investment," Mufteeva added.
The relationship between the United States and its major creditors - China, Japan and Europe - could also be transformed.
Ironically losing AAA status would also make the Washington's task of trimming the deficit much more difficult, as it would raise the cost of government borrowing dramatically.
"Just look at what has happened to Ireland and Portugal," said Ricchiuto.
In 2009 amid mounting debt, Ireland lost its AAA rating, causing the cost of borrowing to more than double.
Some hope Standard & Poor's warning that something similar could happen to the United States will jolt Washington into action.
"This is a real shot across the bow for US politicians of all stripes, highlighting the necessity of coming together before the next presidential election," said Alan Ruskin of Deutsche Bank.
But expectations are not high, as both major parties brace for the 2012 polls.
"Both sides of the policy debate... are likely to use this 'shot across the bow' as vindicating their own particular but very different approaches," David Resler and Aichi Amemiya of Nomura told clients.
Republicans said the warning was evidence Congress should not raise a nearly maxed-out debt limit unless dramatic cuts are made, one of their key demands.
Standard & Poor's did not mention the debt limit, which must be raised by Congress before July or else the US government will be forced to default.
The Treasury Department meanwhile got word of the downgrade late on Friday, and set about working up a response that would limit the damage.
The department did not question Standard & Poor's premise, but said it underestimated the ability of the political parties to reach a deal.
Their next door neighbours at the White House said it proved the need for a deal.
Presenting the warning more like a Post-it note than the jolting sound of an alarm clock in the morning, spokesman Jay Carney said it was "a reminder that it is important that we reach agreement on fiscal reform."
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