Debt doomsayer: Treasury forecasts ‘back to 2008 recession or worse’ if US defaults

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The US government default caused by the ongoing budget standoff in the Congress could have a “catastrophic” effect on the country’s economy, which would be felt for decades, the Treasury Department said in report.

The US government went on partial shutdown this Monday after the Democratic-led Senate turned down repeated efforts by the Republicans to pass a budget, constraining the implementation of ‘Obamacare’ – a healthcare law, which the president considers a centerpiece of his political legacy.

If the Congress fails to raise the $16.7 trillion federal borrowing limit by October 17, the government could begin running out of money to pay its bills, which would result in an unprecedented US debt default.

“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 Treasury said in a report on Thursday.

The consequences of the default, which include high interest rates, reduced investment, higher debt payments, and slow economic growth, would also be sustainable and “could last for more than a generation,” the department warned.

The Treasury said the “we may be starting to see some tentative signs that the current debate is affecting financial markets,” with the crisis already shaking the Wall Street where the Dow Jones Industrial Average dropped 136.66 points (0.90 per cent) to 14,996.48 on Thursday.

The Treasury also noted that the negative spillovers from an “unprecedented” US default would “reverberate around the world” as “credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket.”

The International Monetary Fund has also sounded the alarm over the American debt crisis, which is putting the world economy under threat.

IMF chief Christine Lagarde stressed that it is “mission critical” to urgently find the way out of the stalemate – as she arrived in Washington for the next week’s IMF and World Bank meetings.

“The ongoing political uncertainty over the budget, over the debt ceiling doesn’t help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse and could very seriously damage not only the US economy, but also the entire global economy,” she said.

According to Lagarde, the economic growth in the US has already been hurt by excessive fiscal consolidation, and will be below 2 percent this year before rising by about 1 percentage point in 2014.

Congressional action remains the only way to avoid the US default, an unnamed Treasury official told the reporters.

He stressed that the Treasury Department has no plans of using the Constitution’s 14th Amendment, which says that the validity of the US public debt “shall not be questioned,” to get around the debt limit.

But there are no signs that the budget dispute will be solved before being dragged into a second week, with all of the government’s non-essential workers sent home due to the shutdown.

Obama has refused to negotiate on raising the debt ceiling with the Republicans, saying that offering concessions would set a poor precedent for future heads of the White House.

“If we screw up, everybody gets screwed up. The whole world will have problems,” he said in his emotional speech on Thursday, adding that the debt default would throw the US economy back into a recession.

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