Perilous Times
14 June 2011 Last updated at 20:13 ET
Fed chief Bernanke warns of US debt ceiling crash
Ben Bernanke (14 June 2011) Ben Bernanke suggested stabilising the
deficit as a proportion of the total economy
BBC - The chairman of the US Federal Reserve, Ben Bernanke, has
warned that the country's creditworthiness is at risk if its
borrowing limit is not raised.
He said the US could lose its coveted AAA credit rating if
Congress did not vote in favour of lifting the $14.3 trillion
(£8.7 trillion) debt ceiling.
If there is no deal by August, the US may start defaulting on
obligations.
Vice-President Joe Biden and congressional leaders have resumed
efforts to find a bipartisan solution.
They are trying to reach an agreement that would tie spending cuts
with an increase in the debt limit. They are expected to discuss
annual spending levels, budget process reforms, taxes and
healthcare benefits.
"We're making real progress, we're down to the tough stuff now and
everybody's still in the room," Mr Biden said after Tuesday's
meeting.
President Barack Obama and the Speaker of the House of
Representatives, John Boehner, want an agreement by 4 July.
'Wrong tool'
At a conference on Tuesday organised by a think tank, the
Committee for a Responsible Federal Budget, Mr Bernanke said any
delay in the US government making payments could cause chaos on
global financial markets.
US federal government debt
* US government currently runs a $1.5tr budget deficit,
requiring it to issue debt in the form of treasury bills, bonds
and other securities
* Public debt was $14.3tr on 31 May, up from $10.6tr when Mr
Obama took office in January 2009.
* Most is held by the public, with the rest held in US
government accounts
* Congress has voted to raise the US debt limit 10 times since
2001
Sources: US Treasury, Congressional Research Service,
Congressional Budget Office
It could also damage the dollar's status as a reserve currency, he
warned.
Mr Bernanke said he understood the desire of many politicians to
use the deadline to force some necessary and difficult policy
adjustments, but said the debt limit was "the wrong tool for that
important job".
"Failing to raise the debt limit would require the federal
government to delay or renege on payments for obligations already
entered into."
"Even a short suspension of payments on principal or interest on
the treasury's debt obligations would cause severe disruptions in
financial markets and the payments system."
In addition, Mr Bernanke said US government debt risked being
downgraded, creating fundamental doubts about the nation's
creditworthiness.
Long-term damage to the "special role" of the dollar and of
treasury securities in global markets was also possible, he said.
Instead of allowing a default, Democrats and Republicans needed to
develop a credible long-range plan to rein in the nation's budget
deficit, Mr Bernanke added.
An increase of $2.5 trillion would allow the government to operate
until early 2013.
He suggested stabilising the deficit as a proportion of the total
economy, and lowering the figure over time. Deficit-reduction
goals should be set and enforced with a mechanism triggering
automatic cuts.