Treasury Dept. warns: Default has potential to be ‘catastrophic’

A default on the nation’s debt could thrust the nation into the worst recession since the Great Depression, and even a prolonged standoff could do significant economic harm, according to a new study released Thursday by the Treasury Department.

The report ratchets up pressure on congressional Republicans looking to extract significant concessions from the White House in exchange for a borrowing boost. 

{mosads}”A default would be unprecedented and has the potential to be catastrophic,” the Treasury reported. “Credit markets could freeze, the value of the dollar could plummet, U.S. 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.”

Treasury also argued that the ongoing government shutdown could amp up the risk even further, as an economy weakened by a dwindled federal government is “even more susceptible” to risks around the debt limit.

Officials made clear they see no alternative to Congress providing a timely boost to the borrowing cap.

The
Republican proposal to prioritize debt payments is unworkable, senior
Treasury officials said, and the idea pushed by some Democrats for the
president to raise the debt limit unilaterally is not viable.

The Treasury billed the new report as an attempt to determine the macroeconomic impact of the fight over the $16.7 trillion debt limit.

One day earlier, President Obama invited the heads of major Wall Street banks to the White House to discuss the debt limit. And in an interview with CNBC, he underlined the administration’s concern about the financial impact.

“I think this time is different,” he said. “I think [Wall Street] should be concerned.”

Treasury Secretary Jack Lew has told Congress he has nearly exhausted his abilities to work around the debt limit, and the government would need an increase by Oct. 17 to guarantee it could keep paying all its bills.

To make its case, the Treasury pointed to a recent shift in the price of government debt that will be paid out at end of the month, beyond that deadline. The report claimed that the fact that the rates on those bonds are slightly higher than bonds that mature around the debt limit deadline could be a sign of “nascent concerns” about a potential default.

The report also examined the last major debt limit standoff in 2011 to suggest what could come during a 2013 standoff. It noted that the borrowing rates for everything from corporate debt to mortgages spiked after that August battle, and that household wealth fell $2.4 trillion between the second and third quarter of 2011, when the debt limit fight was running at its hottest. It also found that consumer and business confidence hit their lowest levels at the height of that fight.

However, since the government has never actually defaulted on its debts due to a failure to raise the debt limit, the Treasury admitted in its report that any precise predictions are “impossible,” and that catastrophe, for now, remains just a possibility. Some Republicans have accused the Treasury of exaggerating the risks tied to not raising the debt limit, and believe the government has more time under the current cap than Lew has insisted.

Nonetheless, the business and financial community have been adamant in calling for Congress to immediately raise the debt ceiling to eliminate any potential risk to the economy. And the Obama administration agrees that Congress must hike the limit, believing that the president does not have any ability to avoid a default on his own.

The debt limit push comes as Congress and the White House are still looking to resolve a government shutdown. With the debt limit deadline just two weeks away, many are anticipating the two battles will eventually be wrapped into a single fiscal fight.

— This story was updated at 11:00 a.m.