The Financial Stability Oversight Council (FSOC) warns in its first annual report about the possible effects of the European sovereign debt crises and the risks posed by governmental budget imbalances of all kinds.

FSOC has included only three brief references to the possibility that the United States could begin defaulting on obligations Aug. 2 if President Obama and House Republicans fail to reach an agreement on lifting the statutory cap on U.S. government debt.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created FSOC to help federal regulators keep track of trends that could pose a threat to the stability of the U.S. financial system.

Obama administration officials have argued that a failure to raise the debt ceiling could be devastating.

“Failing to increase the debt limit would have catastrophic economic consequences,” officials at the U.S. Treasury Department say in a comment on the matter. “It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis.”

“It is vital to the stability of the U.S. financial system and the global financial system for the debt limit to be raised in a timely manner to avoid creating any risk of default on U.S. obligations,” FSOC officials say in a short paragraph at the end of the executive summary of the report, and they mention in a paragraph later in the report that current pricing of government debt implies that the market assumes Congress will raise the debt limit.

But FSOC includes no discussion of the risk that the United States could lose its AAA credit rating as a result of problems with budget and debt ceiling negotiations, and it includes much longer discussions of topics such as the possibility that European countries such as Ireland could default on their debts.

The FSOC annual report also provides a general description of the new Federal Insurance Office and a review of the recent performance of the insurance industry.

“Insurers faced challenges during the financial crisis as asset prices fell sharply and some noncore activities such as securities lending produced large losses,” FSOC officials say. “However, the industry withstood the financial crisis quite well in terms of providing insurance services to consumers and businesses. Only 28 of approximately 8,000 insurers became insolvent in 2008 and 2009, and those insurers are being resolved pursuant to applicable state law. The improvement in financial markets has strengthened the insurance sector’s balance sheet and the sector generally is financially healthy.”

FSOC reports that insurance industry exposure to the troubled countries in Europe is “very limited” and is concentrated mainly in private corporations, not in sovereign debt.

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