Default has potential to be "catastrophic" - US Treasury Department.
The report states that a default, which could occur within two weeks without congressional action, would be "unprecedented and has the potential to be catastrophic - credit markets could freeze, the value of the dollar could plummet and US interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse." By looking at the disruptions to financial markets that ensued in 2011, the report examines a variety of economic indicators - including consumer and small-business confidence, stock price volatility, credit-risk spreads and mortgage spreads - through which a similar episode might harm the economic expansion, the report said.
"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 Lew said.
"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 crisis, and Congress must act now to lift the debt ceiling before that recovery is put in jeopardy." The report notes that even the possibility of a default could roil financial markets and damage the economy, thereby harming American businesses and households.
Sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence all tend to undermine economic expansion, it said. It also states that if the current government shutdown is protracted, it could make the US economy even more susceptible to the adverse effects from a debt-ceiling impasse than it was prior to the shutdown.
The US dollar and Treasury securities are at the center of the international finance system.
"In the catastrophic event that a debt-limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression," the report states.
Additionally, there may be tentative signs that the current debate is affecting financial markets. 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, the report says.
"If market participants were to lose confidence in the United States' willingness to repay its debts, the adverse effects seen in 2011 could reappear and even push up yields on Treasury securities," it says.
"Such a rise in Treasury yields would also raise the cost of financing the government's debt and worsen the fiscal position of the government." (end) rm.sd KUNA 031851 Oct 13NNNN
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