MercoPress. South Atlantic News Agency

Bernanke warns Congress of “calamitous outcome” if the US defaults on its debt

Economy too fragile to stand overzealous spending cuts

Federal Reserve Chairman Ben Bernanke warned the United States Congress that overzealous cuts to government spending could derail an already fragile recovery and said a US debt default could wreak financial havoc.

“I only ask ... as Congress looks at the timing and composition of its changes to the budget, that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery,” Bernanke told members of the Senate Banking Committee.

Congress and the White House are stalemated in talks on cutting the budget deficit, with Republicans seeking 2.4 trillion dollars in spending cuts in exchange for agreeing to raise the 14.3 trillion US government borrowing limit. The US Treasury has said it will run out of money after August 2 to pay all of the country's bills if a deal is not reached to raise the debt ceiling.

On the second day of delivering the Fed's semi-annual monetary policy report to Congress, Bernanke renewed his warning that a US debt default would be devastating for the US and global economies.

“It would be a calamitous outcome,” Bernanke said. “It would create a very severe financial shock that would have effects not only on the US economy but the global economy.”

Failure to raise the debt limit in time would constitute a “self-inflicted wound” to the economy emphasized the Fed chairman.