Bernanke says debt limit battle risks crisis

Federal Reserve Chairman Ben Bernanke warned on Tuesday that a failure to lift the government's $14.3 trillion debt ceiling risks a potentially disastrous loss of confidence in America's creditworthiness.

Bernanke said in the absence of a quick resolution to the battle over the debt limit, the United States could lose its prized AAA credit rating, while the U.S. dollar's special status as a reserve currency might be damaged.

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 in remarks prepared for delivery at an event sponsored by the Committee for a Responsible Federal Budget.

Inaction could also 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 long term, Bernanke added.

Vice President Joe Biden and top lawmakers, set to resume budget negotiations on Tuesday, must work around a stark divide on taxes and healthcare as they look for trillions of dollars in savings that would give Congress the political cover to raise the debt ceiling before the government runs out of money.

The Treasury Department has warned the government will begin defaulting on its obligations -- whether debt payments or other bills coming due -- if Congress does not increase the limit by August 2.

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 warned on Tuesday.

Bernanke also repeated his calls for a long-term budget plan. He said that while a considerable portion of recent deficits was due to fallout from the recession, which led to lower revenues and higher stimulus spending, large structural budget issues remain.

Developing a plan now for how to reduce that debt load over time could bolster economic activity today by keeping borrowing costs down and boosting confidence, Bernanke argued.

Maintaining the status quo is not an option, Bernanke said.

He urged the Congress and the administration to work together to come up with ways to bring down the debt.

I hope, though, that such a plan can be achieved in the near term without resorting to brinkmanship, he said.

(Reporting by Pedro Nicolaci da Costa)