Bernanke: US risks 'self-inflicted wound' over debt impasse

The Federal Reserve chairman Ben Bernanke has ramped up pressure on Congress to agree on its debt ceiling level, in light of rating agencies S&P's and Moody's threats to cut the US' AAA debt rating.

Calls for the US to raise its debt ceiling to $14.3trn (£8.6trn) are mounting as Bernanke becomes the latest voice warning Congress on the repercussions of not signing a deal, the Telegraph reported.

Yesterday credit ratings agency Standard & Poors announced plans to cut the US' triple-A status, closely following Moody's announcement it was reviewing the status of US debt on the same day.

Bernanke warned a failure to reach an agreement would be a "self-inflicted wound".

If Congress fails to agree on a plan, in three weeks' time the US economy could be forced to default, a move that would devastate its top-rated credit reputation.

"We are already seeing threats of downgrades from rating agencies," Bernanke told the Senate Banking Committee.

"This is a tremendous asset of the US - the quality and reputation of our Treasury securities - and we benefit from it with low interest rates. I would urge Congress to take every step possible to avoid defaulting on the debt or creating even any significant probability of defaulting on the debt."

A debt default would lead to a major economic crisis and risk a second recession, said Bernanke.

The US has until 2 August to raise its debt ceiling, but cross-party talks have failed to agree on the issue. The US' public debt has surged from $10.6trn (£6.5trn) in January 2009 to $14.3trn at the end of May 2011, the BBC reports.

The warning comes as China, one of the US' biggest creditors, has expressed alarm over its debt levels. Officials in Beijing urged US policymakers to act to protect investors' interests, Reuters reported.

"We hope the US government adopts responsible policies and measures to guarantee the interests of investors," Hong Lei, a foreign ministry spokesman, said in response to questions about the Moody's report.

Chinese ratings agency Dagong Global Credit Rating put its rating of US debt on negative watch list yesterday, pointing to the declining solvency of the US government, slow economic growth and high fiscal deficits.