The chairman of the Federal Reserve warned on Tuesday that a failure to lift the government's borrowing limit could risk a potentially disastrous loss of confidence, giving further impetus to the latest round of deficit-reduction talks by top lawmakers.
Ben Bernanke said the United States could lose its coveted AAA credit rating and the dollar's special status as a reserve currency could be damaged if there was not a quick resolution to the battle over raising the $14.3 trillion debt limit,.
His comments came as Vice President Joe Biden and a bipartisan group of six top lawmakers began the first of three straight days of negotiations to try to breach a stark divide between Republicans and Democrats over taxes and healthcare.
But their quest to find trillions of dollars in budget savings may be complicated by the need to boost the economy in the short term.
The group has two-hour meetings each planned for Tuesday, Wednesday and Thursday this week and they are expected to take a close look at annual spending levels, budget process reforms and healthcare benefits.
The group is stepping up efforts to find a deal that would give Congress the political cover to raise the debt ceiling by an August 2 deadline, when the United States could start defaulting on its obligations. Analysts warned that such a move could cause chaos on global financial markets.
We could actually have a reprise of a financial crisis, if we play this too close to the line. So we're going be working hard over the next month, President Barack Obama said on Tuesday in an interview with NBC's Today show.
Bernanke, who as head of the central bank is independent of the Obama administration, agreed.
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, he said in remarks prepared for delivery at an event sponsored by the Committee for a Responsible Federal Budget think tank.
Many on Wall Street fear that even the briefest default by the United States could sink the dollar and spike interest rates sharply higher, tipping a fragile economic recovery back into recession.
The Biden talks, which began on May 5, have been slow moving as both sides refuse to budge on key issues. Republicans refuse to consider tax hikes while Democrats oppose proposals to cut back on the government-run Medicare healthcare program for future retirees.
Participants have scaled back their rhetoric recently. Eric Cantor, the No. 2 Republican in the House, heaped praise on Biden on Monday and said the group was beginning to see the essence of convergence.
Obama and House of Representatives Speaker John Boehner, the top Republican in Congress, want the group to complete its work by July 4, and markets have made it clear they want to see substantial progress by mid-July.
Deficits are hovering at their highest levels relative to the economy since World War Two. For this year, the U.S. deficit is expected to reach $1.4 trillion.
(Additional reporting by Richard Cowan and Matt Spetalnick; Writing by Deborah Charles; Editing by Doina Chiacu and Cynthia Osterman)