US default would spark 'major crisis': Bernanke

Federal Reserve Board Chairman Ben Bernanke
© AFP/Getty Images/File Alex Wong

WASHINGTON (AFP) – A US debt default would spark a “major crisis” and send shockwaves through the global economy, US Federal Reserve Chairman Ben Bernanke said Wednesday.

If the US does not raise its borrowing ceiling by August 2 and is forced to stop servicing its debt commitments, it would “throw the financial system into disarray and have an enormous effect on the global economy,” he told members of Congress.

Bernanke told the House Financial Services Committee that the US could continue to make payments on debt principal and interest if the ceiling is not raised.

But the alternative would then be to slash domestic spending by as much as 40 percent because of income restrictions, which could bring economic growth to a standstill.

Moreover, Bernanke added, if the US has to cut payments to seniors for health care and social security, rating agencies could still lower the US credit rating for defaulting on commitments, raising the country’s debt service costs.

US President Barack Obama was to hold a fourth straight day of tough budget talks with his Republican foes on Wednesday, as the two sides seemed still far apart on the terms of a longer-term debt deal which would allow the debt cap to be raised.

On Tuesday, the president warned that without a deal by the August 2 deadline, elderly retirees, military veterans and others might not get government benefit checks “because there may simply not be the money in the coffers to do it.”

“I cannot guarantee that those checks go out on August 3 if we haven’t resolved this,” Obama said.

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