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Bernanke says debt-ceiling debate risks 'severe disruptions' in markets

June 14, 2011 |  1:26 pm

Benb Federal Reserve Chairman Ben S. Bernanke on Tuesday again warned Congress against using the federal debt ceiling as a weapon in the battle over budget cuts, calling that strategy "the wrong tool" and one that risks "severe disruptions" in markets and higher interest rates.

The U.S. officially hit its $14.29-trillion debt ceiling May 16, but the Treasury has been able to make technical adjustments in its finances to stay below the limit.

Treasury Secretary Timothy F. Geithner has warned, however, that the government will run out of options Aug. 2 and at that point would be at risk of defaulting on its bonds if Congress fails to raise the borrowing ceiling.

Some Republican leaders have threatened to refuse to lift the ceiling unless the Obama administration agrees to substantial budget cuts.

Bernanke, speaking at the annual conference of the Committee for a Responsible Federal Budget in Washington, left no doubt where he stands on the Republican threat:

Recently, negotiations over our long-run fiscal policies have become tied to the issue of raising the statutory limit for federal debt. I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is 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. In particular, 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, induce ratings downgrades of U.S. government debt, create fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the longer term.

Interest rates would likely rise, slowing the recovery and, perversely, worsening the deficit problem by increasing required interest payments on the debt for what might well be a protracted period.

Budget talks resumed Tuesday between Vice President Joe Biden and congressional negotiators. A key player in the talks, Rep. Eric Cantor (R-Va.), has all but ruled out an intermediary vote on a short-term increase in the debt ceiling to avert the default while negotiations continue, The Times’ Lisa Mascaro reported from Washington.


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-- Tom Petruno

Photo: Federal Reserve Chairman Ben S. Bernanke. Credit: Chip Somodevilla / Getty Images