US economy just a notch above Greece - The Wall Street Journal

US finances are in almost as troubled a state as the worst-hit members of the euro zone, economists say, underscoring the pressing need for Washington to reach agreement on how to reduce the deficit.

A gauge of "sovereign risk" from economists at Deutsche Bank placed the United States just behind Greece, Ireland and Portugal among 14 advanced economies.

The report, from economists led by Peter Hooper, warned that a failure to make substantial political progress on deficit reduction "would substantially raise the risk of a bond market crisis".

The warning comes days after Standard & Poor's said that it may lower its AAA assessment of the US, amid a political log jam over debt reduction in Washington, and will intensify market concerns about Western governments' debts.

Last night George Papandreou, the Greek Prime Minister, strongly criticised credit rating agencies, saying that they were "seeking to shape our destiny and determine the future of our children".

The Finance Ministry in Athens has asked prosecutors to look into an e-mail sent by a London-based Citigroup trader that referred to market rumours of a restructuring of Greek debt as soon as this weekend.

Citigroup has denied any wrongdoing.

Insurance contracts linked to Greek bond swaps suggest that the country has a 67 per cent chance of defaulting within five years, even after accepting a 110 billion euros ($149bn) emergency loan.

This week the implied cost of borrowing on its ten-year bonds rose to 15 per cent, while yields on Irish ten-year government bonds hit 9.8 per cent and yields on their Portuguese equivalents rose to 9.22 per cent.

Greece is one small element of wider sovereign debt concerns that have begun to encompass the US, the world's biggest economy. Capitol Hill has been consumed with political wrangling over whether to increase a $US14.3 trillion ($13.3 trillion) debt ceiling that is due to be breached next month.

If the US national debt hits that level, it would trigger a default.

Deutsche Bank's analysis acknowledged that the risk attached by financial markets to US debt remained very low, as demonstrated by the country's modest borrowing rates. That was in part due to the US dollar remaining the premier reserve currency for world governments.

However, the report noted: "Reputation and reserve currency status can be lost, and failure to move US fiscal policy off its currently unsustainable path would certainly increase the risk."

For the time being, though, Democrats and Republicans have been mired in mudslinging over the debt ceiling.

The White House yesterday accused Republican congressmen of risking a global recession by refusing to agree to raise the debt ceiling unless the move was paired with deep spending cuts.

Even if a deal is struck on time, that will not eradicate the risk of political deadlock over longer-term fiscal problems, such as spiralling healthcare spending.

Projections from the Congressional Budget Office suggest that the national debt could rise from 62 per cent of GDP to 100 per cent in 2025 and 200 per cent by 2040, compared with its 1946 high of 122 per cent.