Debt Ceiling Standoff Could Cause 'Catastrophic' Default, Treasury Warns

10/03/2013 11:13 am ET | Updated Oct 03, 2013

WASHINGTON -- The U.S. Treasury Department on Thursday released a report warning of potentially "catastrophic" damage should Congress fail to raise the debt ceiling and prevent the government from defaulting on its debt.

"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 states.

In recent weeks, Wall Street has become increasingly skittish about the prospect of default, as top Republicans have argued that a standoff over the debt ceiling offers their party the most leverage to exact concessions from a Democratic Senate and a Democratic president. On Tuesday, House Budget Committee Chairman Paul Ryan (R-Wis.) called the debt limit a useful "forcing mechanism." President Barack Obama has said he will not negotiate over the full faith and credit of the United States.

The cost of insuring one-year U.S. bonds against default has quintupled since Sept. 23, according to data from Markit, a financial information company. Treasury Secretary Jack Lew has said that the government will run out of legal options to avoid defaulting on the national debt by Oct. 17.

Thursday's Treasury report mentioned that even the prospect of default can cause economic problems, including lower consumer confidence, stock market volatility and higher interest rates on business loans and mortgages. An actual default could have consequences for years to come. The U.S. has never defaulted on its debt, which is widely considered to be the world's safest financial asset.

"Considering the experience of countries around the world that have defaulted on their debt, not only might the economic consequences of default be profound, but those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation," the report states.

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