US warns of global crisis over its debt
The Chairman of the US Federal Reserve Ben Bernanke arrives to testify before the US House Financial Services Committee on July 13, 2011 on Capitol Hill in Washington, DC.
US Federal Reserve Chairman Ben Bernanke has warned of a global financial crisis if the American $14.3 trillion debt ceiling is not raised by August 2.
Bernanke also emphasized during a Wednesday testimony before the US House of Representative's Financial Services Committee that if the debt ceiling is not raised, the government would choose to stop extending benefits such as Social Security payments to US citizens to pay its creditors instead, Reuters reports.
According to the US Treasury, if the Democratic-controlled White House and the Republican-controlled Congress do not reach a consensus on raising the debt ceiling by August 2, the government will lack funds to pay all of its bills.
The Fed chairman sought to reassure creditors by his insistence that creditors would have priority over American recipients of public benefits.
"The assumption is that as long as possible, the Treasury would want to try to make payments on the principal and interest to the government debt, because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy," Bernanke said.
Bernanke further explained that the government will have to slash domestic spending by as much as 40 percent as an alternative plan. This, however, could bring economic growth in the US to a standstill.
The US reached its $14.3-trillion borrowing limit on May 16, up from $10.6 trillion when US President Barack Obama took office in 2009.
Democrats and Republicans held budget talks on Wednesday for a fourth consecutive day without reaching an agreement.
Both sides remain at odds over the terms of a long-term debt deal to raise the borrowing limit.
Republicans have balked at raising the debt limit without steep spending cuts, while Democrats are pushing to generate revenue by eliminating tax breaks for wealthy individuals and corporations in certain sectors such as the oil and gas industry.