A US default would have severe reverberations in global markets, a top Federal Reserve official said just hours after Fitch Ratings warned it could slash US credit ratings if the government misses bond payments.
St. Louis Federal Reserve Bank President James Bullard told media on Wednesday "the US fiscal situation, if not handled correctly, could turn into a global macro shock."
"The idea that the US could threaten to default is a dangerous one," he said in an interview.
"The reverberations in those global markets would be very severe. That's where the real risk comes in," Bullard warned.
Some Republican lawmakers have said a brief default, which would be inevitable in August if lawmakers fail to raise the nation's $14.3 trillion debt ceiling, might be acceptable if it forces the White House to deal with large budget deficits.
Bullard's warning came just after Fitch said it would slash to "junk" the ratings on all US Treasury securities, seen worldwide as a risk-free investment, if the government misses debt payments by Aug. 15.
The ratings would go back up once the government fulfils its debt obligations, but probably not to the current AAA level, Fitch said, in a stark statement about the impact of even a short-lived default on the US credit-worthiness.
"The notion of flirting with a default on existing obligations flirts with irresponsibility," Richard Bernstein, chief executive of Richard Bernstein Capital Management LLC, said at the Reuters 2011 Investment Outlook Summit in New York.
The White House said Fitch's warning makes it clear that "there is no alternative to raising the debt ceiling."
"This is not about additional spending, this is about honoring the obligations the United States government has made," White House press secretary Jay Carney told a daily briefing.
Moody's and Standard and Poor's have issued similar warnings. But Fitch was the first among the big-three rating agencies to say US Treasury securities could be downgraded, even for a short period, to a non-investment grade.
The agency said even a short-lived default, also called a technical default, "would suggest a crisis of governance from a sovereign credit and rating perspective."
"Clearly the political signals which are coming (from Washington) are a source of concern," David Riley, head of sovereign ratings at Fitch, told Reuters in an interview.
He added, however, that the agency still believes lawmakers will eventually reach an agreement on the debt ceiling.
"We know from previous experiences -- both with the government shutdown and previous episodes with the debt ceiling -- that although you get a lot of brinkmanship, ultimately it does get resolved," Riley said.
President Barack Obama is trying to win congressional approval to raise the nation's legal debt ceiling before an Aug. 2 deadline.
The Treasury Department said on Wednesday the Fitch warning was "another stark reminder" of the need for Congress to act quickly.
Source : ET
St. Louis Federal Reserve Bank President James Bullard told media on Wednesday "the US fiscal situation, if not handled correctly, could turn into a global macro shock."
"The idea that the US could threaten to default is a dangerous one," he said in an interview.
"The reverberations in those global markets would be very severe. That's where the real risk comes in," Bullard warned.
Some Republican lawmakers have said a brief default, which would be inevitable in August if lawmakers fail to raise the nation's $14.3 trillion debt ceiling, might be acceptable if it forces the White House to deal with large budget deficits.
Bullard's warning came just after Fitch said it would slash to "junk" the ratings on all US Treasury securities, seen worldwide as a risk-free investment, if the government misses debt payments by Aug. 15.
The ratings would go back up once the government fulfils its debt obligations, but probably not to the current AAA level, Fitch said, in a stark statement about the impact of even a short-lived default on the US credit-worthiness.
"The notion of flirting with a default on existing obligations flirts with irresponsibility," Richard Bernstein, chief executive of Richard Bernstein Capital Management LLC, said at the Reuters 2011 Investment Outlook Summit in New York.
The White House said Fitch's warning makes it clear that "there is no alternative to raising the debt ceiling."
"This is not about additional spending, this is about honoring the obligations the United States government has made," White House press secretary Jay Carney told a daily briefing.
Moody's and Standard and Poor's have issued similar warnings. But Fitch was the first among the big-three rating agencies to say US Treasury securities could be downgraded, even for a short period, to a non-investment grade.
The agency said even a short-lived default, also called a technical default, "would suggest a crisis of governance from a sovereign credit and rating perspective."
"Clearly the political signals which are coming (from Washington) are a source of concern," David Riley, head of sovereign ratings at Fitch, told Reuters in an interview.
He added, however, that the agency still believes lawmakers will eventually reach an agreement on the debt ceiling.
"We know from previous experiences -- both with the government shutdown and previous episodes with the debt ceiling -- that although you get a lot of brinkmanship, ultimately it does get resolved," Riley said.
President Barack Obama is trying to win congressional approval to raise the nation's legal debt ceiling before an Aug. 2 deadline.
The Treasury Department said on Wednesday the Fitch warning was "another stark reminder" of the need for Congress to act quickly.
Source : ET
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