Warnings piling up on failure to raise debt ceiling

Dimon’s comments come a day after Moody’s Investors Service threatened to lower the U.S. government’s triple-A bond rating as the White House and congressional negotiators continue working toward an agreement to raise the $14.3 trillion debt ceiling with default looming on Aug. 2.

President Obama, who has met each day this week with congressional leaders in an effort to reach an agreement, may move talks to Camp David this weekend after Wednesday’s discussions ended on a tense note. 

Obama gave negotiators until Friday to reach a consensus. 

Standard & Poor’s has added a new twist to the situation, saying a downgrade of the government’s credit rating could occur if no agreement is reached and the government prioritizes its payments and makes debt payments. 

That runs counter to an argument made by Sen. Pat Toomey (R-Pa.) who continues to argue that if the debt ceiling isn’t increased, the U.S. could still pay certain debts and technically not default. 

Earlier Thursday, Toomey told The Hill that the major issue for the U.S. is to reduce long-term deficits. Moody’s, S&P and other ratings agencies have said the federal government needs a plan to reduce burgeoning deficits, which are in line to eclipse $1 trillion this year. 

S&P’s latest warning “doesn’t change the fundamental reality one bit,” Toomey said. “The reality is we’ve got to fix this completely unsustainable path that we’re on.”

Toomey said he was confident that Treasury is working on a contingency plan.

“Everybody has acknowledged, almost universally now, there’s more than enough revenue to pay debt service,” Toomey said. “And I have always acknowledged that there would be other things that would have to be cut, which would be very disruptive and is not desirable.”

Toomey questioned Federal Reserve Chairman Ben Bernanke about the issue during a Senate hearing but didn’t get any support to buoy his argument. 

Failure to raise the debt ceiling could cause an increase in interest rates that would affect debt levels, piling onto the already burgeoning debt and deficit, Bernanke said. 

Bernanke said mortgage rates could increase by 2 percentage points along with other borrowing costs, which could create more fiscal uncertainty and increase the 9.2 percent unemployment rate. 

“It’s counterproductive to reducing the deficit,” he said. “It’s going in the opposite direction of fiscal stability.”

Bernanke backed a two-pronged approach of raising the debt ceiling while also trying to improve the nation’s fiscal situation. 

“I’d like to see both parts work,” he told the Senate Banking, Housing and Urban Affairs Committee. “This is an opportunity we haven’t had in awhile.”

Inaction on the debt ceiling would be “a self-inflicted wound” and “it’s not an option we should be considering,” he said. 

If negotiators can’t reach an agreement by Aug. 2, it would be “calamitous” and create a “severe financial shock.”

Bernanke, in his second day on Capitol Hill, again made it clear that while the Fed is open to additional stimulus efforts, the central bank “is not prepared to take further action.”

He also told lawmakers that the Fed wouldn’t have any recourse and “can’t be expected to offset the impact” of a default.