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Governors urge debt deal to avoid "embarrassment"

By Edith Honan

SALT LAKE CITY (Reuters) - State governors meeting in Utah on Saturday urged a speedy resolution to the deadlock in Washington over lifting the U.S. debt ceiling to avoid what they called an embarrassing default on U.S. obligations.

"This is a dangerous and equally ridiculous situation that's playing itself out. It takes one sentence to solve this problem -- and that's to lift the debt ceiling," Connecticut Governor Dannel Malloy, a Democrat, told Reuters at a National Governors Association meeting in Salt Lake City.

Malloy predicted political leaders in Washington would ultimately reach an agreement to avoid a default.

State governors are closely watching developments in Washington, where President Barack Obama and his fellow Democrats are in a standoff with congressional Republicans in talks intended to reach a deal to lift the debt ceiling.

The governors are concerned over the impact of the debt situation in Washington in part because it could have an impact on their own individual states' credit ratings.

The U.S. Congress must raise the $14.3 trillion limit on U.S. borrowing by August 2 or the federal government will run out of money to pay its bills, causing turmoil in global financial markets and potentially forcing the United States into another recession.

Republicans in Washington are demanding deep government spending cuts as part of a deal to raise the debt limit while Obama and the Democrats want tax increases on the wealthy also to be part of the agreement. Republicans oppose tax increases.

"I really think we need more statesmen and less politicians in Washington right now because it is a situation that must be solved. And I honestly believe it will be. Everyone's posturing -- both sides," Alabama Governor Robert Bentley, a Republican, said in an interview.

'AN EMBARRASSMENT'

Virginia Governor Bob McDonnell, a Republican, added, "It would be an embarrassment for the United States of America to default on its obligations."

"At the same time, there's got to be a recognition that Congress and the presidents have over-spent and over-promised now for 30 or 40 years. And the bills are due," McDonnell told Reuters.

Rhode Island Governor Lincoln Chafee, a former Republican who is now an independent, said, "We went on a tax-cutting rampage and a spending spree. And the math just does not add up. We're a crippled economy as a result."

The impasse in Washington, which could lead to missed debt payments, has prompted rating agencies to say the nation's coveted AAA rating could be in jeopardy.

This week, Moody's placed more than 7,000 ratings affecting about $130 billion in municipal debt on review for a possible downgrade due to a close connection with the U.S. government.

"This is big stuff that somebody is playing with, and the fact that it's become a partisan battle ... it's not what's good for America," said North Carolina Governor Bev Perdue, a Democrat.

Perdue said on Friday her state finance director was notified by Moody's that it would review the state's AAA rating. Perdue expressed confidence North Carolina would hold on to the top rating.

A Moody's spokesman said the rating agency was "looking at the AAA rated states and will announce any rating actions over the next week for states."

(Editing by Will Dunham and Todd Eastham)

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