China downgrades US credit rating - What's the impact?

China's statecontrolled credit rating agency, Dagong Global Credit Rating Co, has pushed US rating into negative territory.

The move might mean drastic cut in China's purchases of US bonds, which will put pressure on US borrowings. China is the largest foreign holder of US debt, with holdings amounting to $1.15 trillion as of April 2011 end.

What if US defaults on its debt?

As of Thursday, not only has Congress failed to reached a deal concerning the increase of the debt ceiling but at this point their not even close to a compromise. With August 2nd, the date at which Treasury Secretary Tim Geithner says the US will default, only four days away the situation is getting scary.

Republican leader, House Speaker John Boehner, is pressing forward with a short-term plan that increases the debt ceiling by $1 trillion. However, President Barack Obama has continuously threatened to veto any bill that is short term and is looking for an increase of $2.4 trillion to the debt ceiling. Thus, it seems that going into the weekend Washington DC is at an impasse.

So what could happen if no deal is reached and the US defaults on its debt?