Treasury Warns Debt Default Could Trigger 2008-Style Crisis

In its report, Treasury examines the disruptions to financial markets that ensued in 2011, including a variety of economic indicators  — consumer and small business confidence, stock price volatility, credit risk spreads and mortgage spreads — and says a similar episode might harm the economic expansion.

Treasury also says that if the current government shutdown is protracted, 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.

“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 in releasing the report. “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.”

In the event of a default, Treasury says the U.S. economy could be plunged into a recession worse than any seen since the Great Depression. “The U.S. dollar and Treasury securities are at the center of the international finance system,” the report says. “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.”