credit rating agencies

With time running out on a deal to raise the U.S. debt ceiling, Moody's Investors Service turned up the heat by warning Washington's bickering politicians that any missed debt payments will result in a credit rating downgrade.

Such a downgrade would have economically catastrophic consequences, roiling stock markets worldwide, sharply increasing borrowing costs for the U.S. government as well as businesses, and derailing an already-anemic economic recovery.

Indeed, Moody's announcement triggered a 1.1% drop in the dollar on Wednesday - its biggest one-day drop in six months.

Most observers have assumed that Congress and U.S. President Barack Obama would eventually reach a deal on raising the $14.3 trillion debt ceiling and the growing federal deficits before the Aug. 2 deadline - necessary to avoid losing the ability to borrow and a possible default on the federal debt.

But with little progress having been made on a deal and the deadline less than three weeks away, concern is growing that ideological stubbornness and posturing for the 2012 elections had led to an impasse.

"They are worried they are having these ideological arguments while Rome burns," Carl Kaufman, portfolio manager at Osterweis Capital Management, told Reuters.