A US government default caused by Congress failing to raise the $16.7 trillion federal debt limit could have catastrophic consequences that might last decades.
This is according to a new US Treasury Department report today.
"Not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation,” the Treasury said.
"In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth," the department warned in the report.
It said that many private-sector analysts believe that it would lead to events of the magnitude of late 2008 or worse - the result then was a recession more severe than any seen since the Great Depression.
The Obama administration and Republicans in Congress are at an impasse over ending a partial government shutdown that began October 1 and on raising the debt ceiling.
The first face-to-face talks between President Barack Obama and congressional leaders yesterday failed to break the logjam.
The shutdown makes the economy especially vulnerable to adverse consequences of the debt-ceiling impact, according to the Treasury.
“The US dollar and Treasury securities are at the centre of the international financial system,” the Treasury said in its report.
“A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse," it added.
So far, the financial-market response to the political gridlock has been muted. But the Treasury said it sees signs of some investor concerns.
“We may be starting to see some tentative signs that the current debate is affecting financial markets,” the Treasury said today.
“Although the price moves are small and could easily reverse quickly, the fact that yields on Treasury bills that mature at the end of October are higher than bills that mature immediately before or after, might suggest nascent concerns about possible delays in payments on those bills.”
US Treasury Secretary Jacob J Lew has said the Treasury projects that it will exhaust its “extraordinary measures” to stay under the debt limit by no later than October 17 and will then have about $30 billion in cash on hand.
Postponing a debt-ceiling increase “to the very last minute is exactly what our economy does not need,” Lew said in the report.
Bank chiefs warn of 'adverse' consequences
Meanwhile, chief executives from major financial institutions met with President Barack Obama yesterday and warned of "adverse" consequences if US government agencies remain closed and if lawmakers failed to raise the US debt ceiling by mid-October.
Goldman Sachs chief executive Lloyd Blankfein, while stressing that the business leaders who met with Obama represented diverse political views, implicitly criticised Republicans for using their opposition to the healthcare law as a weapon that could lead to a US default.
"You can litigate these policy issues. You can re-litigate these policy issues in a political forum, but they shouldn't use the threat of causing the US to fail on its obligations to repay on its debt as a cudgel," Blankfein said.
"There's no debate that the seriousness of the US not paying its debts ... is the most serious thing we have, and we witnessed that in August 2011 and you saw the ramifications: a slowdown in the economy," said Brian Moynihan, chief executive of Bank of America.
The US came close to default during a similar political crisis in 2011. That standoff prompted a first-ever downgrade of the country's credit rating.
Business leaders made clear the financial world wanted to avoid the risk of the government not paying its bills.
"There is precedent for a government shutdown. There's no precedent for default. We're the most important economy in the world. We're the reserve currency of the world," said Blankfein.
Michael Corbat of Citigroup, Jamie Dimon of JPMorgan Chase & Co, Robert Benmosche of AIG, James Gorman of Morgan Stanley and John Stumpf of Wells Fargo, among others attended the session along with Vice President Joe Biden.
"I think both sides have a pretty good appreciation for what's at stake here," said Citi's Corbat. He said the executives were "trying to encourage both sides to engage."
