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Business News/ News / World/  Treasury says US default impact may last more than generation
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Treasury says US default impact may last more than generation

US default can lead to a recession that will echo the events of 2008 or worse

US secretary of treasury Jacob Lew. Photo:AFP (AFP)Premium
US secretary of treasury Jacob Lew. Photo:AFP
(AFP)

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, the treasury department said in a report on Thursday.

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 report.

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—with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression, the department said in the report.

The Obama administration and Republicans in Congress are at an impasse over ending a partial government shutdown that began 1 October 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.

2008 echo

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.

So far, the financial-market response to the political gridlock has been muted. The Standard & Poor’s 500 Index was at 1,678.84 at 10:25 a.m. on Thursday compared with 1,681.55 on 30 September, the yield on the 10-year Treasury note has slipped 1 basis point to 2.60% , and the Dollar Index is down 0.5%.

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 on Thursday.

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.

Congressional action

The Treasury doesn’t plan to use a constitutional amendment to get around the debt limit, and prioritizing payments to pay its most important bills would be unworkable, according to a Treasury official who spoke to reporters today on condition of anonymity. Congressional action is the only way to avoid default, the official said.

The Constitution’s 14th Amendment says the validity of the public debt of the United States shall not be questioned.

The Obama administration has previously dismissed the idea of invoking the amendment to get around the debt limit.

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 17 October 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.

Obama met yesterday with financial-industry executives including Goldman Sachs Group Inc. chief executive officer Lloyd Blankfein and JPMorgan Chase & Co. chief executive officer Jamie Dimon.

Blankfein said after the meeting that lawmakers are risking the economic recovery if they don’t raise the debt limit.

“ The meeting was part of an effort by the Obama administration to leverage the business community’s clout in breaking the stalemate." BLOOMBERG

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Published: 03 Oct 2013, 08:46 PM IST
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