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Failure to raise the U.S. debt ceiling could lead to ratings downgrades, damaging the special role of dollar and treasury market, the nation's top central banker told an influential conservative group Tuesday.
Federal Reserve Chairman Ben Bernanke acknowledged the long-term risks associated with soaring debt, but said that 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 could cause severe disruptions in financial markets and the payments system," Bernanke said at a event held by the Committee for a Responsible Federal Budget.
According to the Treasury, the government risks defaulting on its obligations if lawmakers fail to raise the $14.3 trillion debt ceiling by August 2.
Earlier in June, Moody's Investors Service warned it may place the U.S. government's top credit rating under review for a possible downgrade unless Congress takes steps toward a compromise by the middle of July.
Republicans have threatened to refuse to raise the debt ceiling unless Democrats agree to massive spending cuts.
Lawmakers should not to play politics with the debt ceiling, warned Bernanke. Failing to raise the debt limit is "the wrong tool" for the necessary goal of lowering the federal budget deficit.
Bernanke urged Congress to address fiscal stability as part of a long-term plan, but warned that near-term budget cuts could imperil the fragile economic recovery.
"Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point," he added.
