Treasury officials warn of dangers of default

Posted by Anita Kumar on October 3, 2013 

The Treasury Department released a six-page report on the dangers of default Thursday morning that will be given to members of Congress. "The Potential Macroeconomic Effect of Debt Ceiling Brinkmanship," is part of a campaign to pressure House Republicans to vote to raise the debt ceiling before the Oct. 17 deadline. (A senior Treasury officials says the partial shutdown of the federal government will not change the Oct. 17 timeline.)

"The United States has never defaulted on its obligations, and the U S. dollar and Treasury securities are at the center of the international financial system," according to the report. "A default would be unprecedented and has the potential to be catastrophic: 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."

The report says that even the possibility of a default could roil financial markets and damage the economy with sharp declines in household wealth, increases in the cost of financing for businesses and households and a fall in private-sector confidence. It says that if the government shutdown drags on, it could make the U.S. economy even more susceptible to the adverse effects from a debt ceiling impasse than it was prior to the shutdown.

In 2011, according to the senior Treasury officials, just the possibility of potential default led to substantial effects on the U.S. economy. There's no precedent for default so it's possible to outline all the consequences, but the official said it would be worse than the 2008 recession.

"As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy," Treasury Secretary Jacob J. Lew said in a statement. “Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need – a self-inflicted wound harming families and businesses. Our nation has worked hard to recover from the 2008 financial criss, and Congress must act now to lift the debt ceiling before that recovery is put in jeopardy.

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