US Parties Rachet up Blame Game Post Credit Downgrade

* Further U.S. downgrade feared within two years

* Tax increases vs spending cuts divide parties

WASHINGTON (Reuters) - U.S. political parties on Sunday traded blame for the country's loss of its top-tier AAA credit rating from Standard & Poor's, raising doubts lawmakers can still find a common ground to solve the country's debt problem.

S&P on Friday cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficit and rising debt burden, a decision that put Washington's dysfunctional politics under the spotlight.

"It's a partial wake up call. I think this is without question, a Tea Party downgrade," Democratic Senator John Kerry told NBC's "Meet the Press." "This is one of the most telling moments in the history of our country right now."

Kerry, who was the Democratic Party's 2004 presidential candidate said the conservative Tea Party movement had held the country hostage by consistently shooting down President Barack Obama's plan that would have cut the country's debt by $4 trillion over ten years.

"In the end they thought the hostage was worth ransoming," said Kerry.

But Republican Senator John McCain said the downgrade was an indictment of Obama's leadership.

"I agree there is dysfunction in our system and a lot of that has to do with failure of the president of he United States to lead," said McCain who lost the 2008 race for the White House to Obama.

"The president never came forward with a plan, there was never a specific plan. There was always that leading from behind."

Congress last month engaged in an ugly fight over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.

Last Tuesday, Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.

"We could have reached an agreement a lot earlier, but members of the House of Representatives had a mandate from last November," said McCain. "For them to agree to tax increases and spending increases was obviously a repudiation of the mandate that felt they had."

TAXES VERSUS SPENDING

The parties are still poles part on how to tackle the deficit problem, without derailing an already fragile recovery.

While Kerry pushed for tax increases and more investment in infrastructure as part of the solution, McCain saw tax hikes as not viable and targeted for cuts mandatory spending such as Medicare health care for the elderly instead.

House of Representatives budget panel chairman Paul Ryan said on "Fox News Sunday" he was pessimistic on the outlook for a compromise with rival Democrats. "I don't think a grand bargain is going to come out of this, because they're not putting health care reform on the table." He said he hoped for a down payment on debt reduction through action of a special deficit committee.

This is hardly comforting, specially as the S&P repeated its warning on Sunday that there was a one in three chance of a further credit rating downgrade over the next six months to two years.

"We have a negative outlook ... from six months to 24 months," Standard & Poor's managing director John Chambers said on ABC's "This Week."

"And if the fiscal position of the United States deteriorates further or if the political gridlock becomes more entrenched, then that could lead to a downgrade. The outlook indicates at least a one in three chance of a downgrade over that period."

The political gridlock in Washington over addressing the long-term fiscal problems facing the United States comes against the backdrop of slowing economic growth.

The economy barely grew in the first half of the year and former Federal Reserve Chairman Alan Greenspan warned growth could further slow down.

"With all of this bickering going on, the economy is slowing down," said Greenspan told NBC's "Meet the Press". "I don't see a double-dip, but I do see it slowing down. This deficit problem that sits out there is much larger than we've been calculating."

(Reporting by Lucia Mutikani, Anna Yukhananov and Jackie Frank; Editing by Jackie Frank)