FITCH WARNING

NEW YORK (Reuters) - A default would have severe reverberations in global markets, a top Federal Reserve official said just hours after Fitch Ratings warned it could slash credit ratings if the government misses bond payments.


St. Louis Federal Reserve Bank President James Bullard told Reuters on Wednesday "the U.S. fiscal situation, if not handled correctly, could turn into a global macro shock.

"The idea that the U.S. could threaten to default is a dangerous one," he said in an interview.

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"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 Treasury securities, seen worldwide as a risk-free investment, if the government misses debt payments by August 15.

The ratings would go back up once the government fulfills 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 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."