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Failure to lift debt ceiling could be disastrous: Bernanke

U.S. Federal Reserve Board Chairman Ben Bernanke speaks at the International Monetary Conference in Atlanta, Georgia, June 7, 2011. Bernanke

Reuters/Tami Chappell/Reuters/Tami Chappell

U.S. Federal Reserve Chairman Ben Bernanke warned on Tuesday that a failure to lift the government's $14.3-trillion (U.S.)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 triple-A credit rating, while the 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," Mr. Bernanke said in remarks prepared for delivery at an event sponsored by the Committee for a Responsible Federal Budget.

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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," Mr. 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 Aug. 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.

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