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It was a global wake-up call for Washington to end its pitched battle over the U.S. debt limit.

With the deadline to raise the country's debt ceiling fast approaching and financial markets showing signs of skittishness, a chorus of voices warned America's leaders that a failure to end the deadlock with a plan to cut the deficit would plunge the country deeper into trouble.

China, America's biggest international creditor with more than $1-trillion (U.S.) in treasury debt, called on the United States to adopt responsible policy, while Wall Street's leading banker, JPMorgan Chase chief executive officer Jamie Dimon, cautioned that "no one can tell me with certainty that a default wouldn't cause a catastrophe and therefore it's irresponsible to take that chance."

U.S. Federal Reserve Chairman Ben Bernanke weighed in as an unbiased voice in what has become intensely partisan fight in Washington. Before some signs of compromise emerged late Thursday, the Federal Reserve chairman used a Capitol Hill appearance to offer a stark appraisal of the high stakes in the standoff between the White House and Republicans over lifting the $14.3-trillion debt ceiling, warning failure to end the deadlock would be a "self-inflicted wound."

He painted a grim picture of how failure to strike a deal would worsen the country's budget woes and, with millions of Americans still out of work, rock an already faltering recovery.

Failing to raise the debt ceiling would tarnish the U.S.'s reputation as the safest place in the world to invest. Credit rating agencies likely would remove the United States from the select group of countries that receive their highest scores, a move that would start a chain reaction that would result in higher borrowing costs for the government. That's because the lower a country's credit rating, the higher the interest rate it must promise to get investors to buy its debt.

As if to underscore Mr. Bernanke's dire words, credit rating agency Standard & Poor's warned Thursday night that it could cut the U.S. credit rating within three months, citing an "increasing risk" of a policy deadlock beyond any agreement on just the debt ceiling. "There is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling," S&P said. "As a consequence, we now believe that we could lower our ratings on the U.S. within three months," the agency said.

S & P's warning came a day after Moody's Investors Service warned it is also considering downgrading the U.S.'s triple-A status, citing a lack of faith in the ability of politicians to make the unpopular decisions necessary to narrow a budget deficit that is 10 per cent the size of the economy.

The Treasury Department says that without new borrowing authority, it will be unable to pay U.S. creditors past Aug. 2.

President Barack Obama and congressional leaders met at the White House for a fifth consecutive day, wrangling over a political compromise to raise the debt ceiling. While Mr. Obama continued to hold out for a grand bargain that would end further bickering over a borrowing limit until after the 2012 election, lawmakers appeared to be moving toward a temporary fix suggested by Republican Mitch McConnell that would allow the President to raise the debt cap in increments over the next year.

Some Republican politicians say they are prepared to miss the August deadline, and Mr. Obama said this week that he would refuse to sign any short-term extension. As negotiations drag on, the debate has become increasingly theatrical, distracting from the consequences of stumbling past the deadline.

"Loss of investor confidence could potentially raise interest rates quite significantly," complicating efforts to reduce the country's debt burden, Mr. Bernanke told the Senate Banking Committee. "If you raise rates, that means your interest costs go up substantially, and you're actually making – you're regressing rather than progressing on this."

For decades, raising the debt limit has been routine. This time, Republicans elected in November under the Tea Party banner are refusing to do so unless Mr. Obama and Democratic lawmakers accept significant spending cuts. Republicans have refused to consider tax increases as part of any compromise.

After a White House suggestion that leaders retreat to Camp David this weekend was rebuffed, Mr. Obama told lawmakers that they have until Friday to reach an agreement on immediate budget changes or find another way to raise the debt limit, Bloomberg News reported, citing unnamed Democratic officials.

Before the White House meeting, Senate Majority Leader Harry Reid, a Democrat from Nevada, confirmed that he and his Republican counterpart, Kentucky's Mr. McConnell, had met to work on a fallback plan.

Mr. McConnell earlier this week proposed granting Mr. Obama the authority to raise the debt limit in instalments, a scheme that would fail to guarantee immediate spending reductions, but would shift the political accountability totally to Mr. Obama.

New York Senator Charles Schumer, the third-ranking Democratic leader, said his party preferred a more comprehensive agreement, but confirmed that Democrats are looking at Mr. McConnell's suggestion as a "last-choice" alternative.

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