Thread: US default could be 'catastrophic': Treasury

US default could be 'catastrophic': Treasury


US Secretary of Treasury Jacob Lew addresses the fall breakfast of the Economic Club September 17, 2013 in Washington (AFP Photo/Alex Wong)

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Washington (AFP) - A US default on its obligations forced by Congress not raising the country's borrowing ceiling would have catastrophic effects, the Treasury warned Thursday.

With the government likely to exhaust its cash reserves around October 17, the Treasury said being forced into non-payment of any of its obligations -- and in particular its debt -- would spark turmoil in financial markets and possibly send the country back to a recession as deep as that of 2008-2009.

"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," the Treasury said in a report.

"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."

The government is already just barely operating below the $16.7 trillion debt ceiling, using "extraordinary measures" since May to meet a chronic deficit of about $60 billion a month.

Those measures will be exhausted by October 17, leaving the Treasury with only a small amount of cash to meet constant payment obligations.

The Treasury said that the impasse in Congress over passing a new budget and raising the debt ceiling had already tentatively affected markets, echoing the fight over raising the limit two years ago.

The July-August 2011 battle went to the brink of default and, though that did not happen, still saw the US triple-A credit rating cut by Standard & Poor's.

A senior Treasury official, speaking on condition of anonymity, said that even without a default, the 2011 debacle put "long-lasting scars" on the economy.
The official cited a decline in household wealth, a fall in business confidence, and a rise in loan rates for business and home buyers.

"Even the possibility of a default, that comes up through political brinksmanship, has the possibility of harming the economy."

The official said that by October 17 the Treasury will have only $30 billion in cash on hand and facing payment requirements that sometimes top $60 billion in one day.

So far that is not affected by the government shutdown which began on October 1, after Congress failed to agree on a funding bill for the new 2014 fiscal year, the official said.

But the official would not detail just what kind of obligations the Treasury would first be forced to renege on when its cash pile expires -- debt service, retirement benefits, health care services, or other regular payments.

"Forecasting this, the payments, is difficult, particularly in this environment, with the government shut down in the first place."

"The only way out of this is for Congress to act," the official said. “There are absolutely no good options”

http://news.yahoo.com/us-default-could-catastrophic-treasury-143933424.html

Boehner Tells Republicans He Won’t Let the Nation Default

By ASHLEY PARKER and ANNIE LOWREY
Published: October 3, 2013

WASHINGTON — With a budget deal still elusive and a deadline approaching on raising the debt ceiling, Speaker John A. Boehner has told colleagues that he is determined to prevent a federal default and is willing to pass a measure through a combination of Republican and Democratic votes, according to one House Republican.

Representative John A. Boehner, the House speaker, arrived at the Capitol on Thursday with his security personnel on the third day of the government shutdown.

The lawmaker, who spoke on the condition of anonymity, said Mr. Boehner had said he would be willing to violate the so-called Hastert Rule if necessary to pass a debt-limit increase. The informal rule refers to a policy of not bringing to the floor any measure that does not have a majority of Republican votes.

Other Republicans also said Thursday that they got the sense that Mr. Boehner would do whatever was necessary to ensure that the country did not default on its debt.
Representative Michael G. Fitzpatrick, Republican of Pennsylvania, who was one of just 22 House Republicans this year who helped Mr. Boehner pass three crucial bills — to avert a fiscal showdown, to provide relief for the victims of Hurricane Sandy, and to pass the Violence Against Women Act — with a majority of Democratic support, said he expected that he may be asked to do so again.
“Hurricane Sandy, the fiscal cliff, all of the big votes require reasonable Republicans and Democrats to come together in order to pass it and get it to the president’s desk,” he said. “This will be no different.”
And, Mr. Fitzpatrick added, “I’ve been there in the past, and I’m prepared to be there again.”
Representative Leonard Lance of New Jersey, one of the moderate Republicans who met privately with Mr. Boehner on Wednesday, would not provide details of the meeting, but said, “The speaker of the House does not want to default on the debt on the United States, and I believe he believes in Congress as an institution, and I certainly believe he is working for the best interests of the American people.”
Passing a measure with a majority of Democratic votes could cause trouble for Mr. Boehner from his right flank. He has so far refused to bring to the floor a measure that could halt the federal government shutdown but would require significant support from Democrats.
While not addressing the Hastert Rule specifically, a spokesman for Mr. Boehner said that the speaker knew that a default must be headed off.
“The speaker has always been clear that a default would be disastrous for our economy,” said Michael Steel, a spokesman for Mr. Boehner. “He’s also been clear that a ‘clean’ debt hike cannot pass the House. That’s why the president and Senate Democrats should drop their ‘no negotiations’ stance, and work with us on a plan to raise the debt limit in a responsible way, with spending cuts and reforms to get our economy moving again and create jobs.”
A Treasury Department report released on Thursday said the debt-limit impasse could cause credit markets to freeze, the dollar to plummet and interest rates to rise precipitously. A default might prove catastrophic, the report said, and could potentially result “in a financial crisis and recession that could echo the events of 2008 or worse.”
The administration has made increasingly strong public warnings about the potential economic consequences of not increasing the debt limit.
“As reckless as a government shutdown is, as many people as are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse,” Mr. Obama said on Thursday, speaking to construction workers at M. Luis Construction in Rockville, Md., a suburb north of Washington.
He said that a default would be “the height of irresponsibility,” adding that “there will be no negotiations over this.”
“The United States is the center of the world economy,” Mr. Obama said, “so if we screw up, everybody gets screwed up — the whole world will have problems.”
Many market participants interpret the White House’s public statements as an effort to get Wall Street to pay attention, even to provoke a market reaction that might spur Congress to act.
With the shutdown continuing and concerns about the debt ceiling growing, stocks slid on Thursday morning, with the Dow Jones industrial average down about 1 percent.
“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 urging lawmakers to act. “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.”
The Treasury report shows that the Congressional debt-limit standoff in 2011 hurt consumer confidence, small-business confidence, household wealth and the stock market, with ramifications for lending and the economic recovery.
“A precise estimate of the effects is impossible,” the report says, “and the current situation is different than that of late 2011, yet economic theory and empirical evidence is clear about the direction of the effect: a large, adverse, and persistent financial shock like the one that began in late 2011 would result in a slower economy with less hiring and a higher unemployment rate than would otherwise be the case.”
Reports from a variety of economists and investment banks have come to the same conclusion. The government’s running out of money would be unprecedented, and thus the fallout remains unknowable. But there is the potential for a market calamity that could have global ramifications.
“The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse,” Christine Lagarde, the managing director of the International Monetary Fund, said in a speech on Thursday morning. “It is mission-critical that this be resolved as soon as possible.”
Economic officials have privately indicated that they are worried Washington’s repeated flirtations with budgetary and financial crises have inured the markets to the real possibility of missed or delayed payments, or even default. By mid-October, the Treasury expects to have only $30 billion in cash on hand, meaning that on any given day it might have too little money to pay all the government’s bills.
The Dow Jones industrial average is about 1 percent higher than it was a month ago, and up about 15 percent this year. But the stock market has slid for the past two weeks. One-month Treasury yields have jumped to their highest level in nearly a year.
Right now, Democrats and Republicans remain at loggerheads over financing the federal government. Some Republicans have suggested that a broader bargain, including changes to entitlement programs, might be one path forward. But the White House has insisted that Republicans not include the debt ceiling in any negotiations.
Nearly 190 Democrats, including all members of the party’s House leadership team, have signed a letter circulated by Representative Peter Welch of Vermont supporting a “clean” debt-ceiling extension.
Republicans “view the health care bill as an existential threat to the country, and they are willing to use all tactics, including blowing up the economy, to get rid of Obamacare,” Mr. Welch said in an interview. “If shutdown and default become legitimate tactics, any Congress in the future could use those tactics to get their way.”
Wall Street “should be concerned,” President Obama told CNBC on Wednesday. “When you have a situation in which a faction is willing to potentially default on U.S. government obligations, then we’re in trouble.”
He added that it was “important” for Wall Street “to recognize that this is going to have a profound impact on our economy and their bottom lines, their employees and their shareholders.”
http://www.nytimes.com/2013/10/04/us/politics/debt-limit-impasse.html?_r=0