UPDATE 3-Don't play with fire on U.S. debt, say policymakers worldwide

Thu Oct 3, 2013 4:39pm EDT

* U.S. Treasury warns of economic catastrophe

* IMF chief says default would ricochet worldwide

* Fed and ECB officials also express concerns

By Jason Lange

WASHINGTON, Oct 3 (Reuters) - Top officials of U.S. and international financial institutions ramped up warnings on Thursday that failure to raise the U.S. debt ceiling to prevent the world's largest economy from defaulting would deal a serious blow worldwide.

The warnings from the U.S. Treasury, the head of the International Monetary Fund and central bankers at home and abroad amounted to a shot across the bow of lawmakers on Capitol Hill whose failure to agree on a funding bill has already led to a partial shutdown of the U.S. government.

The shutdown prompted growing concern of wider economic consequences when it stretched into a third day on Thursday, and President Barack Obama challenged Republicans to "stop this farce" by allowing a straight vote on a spending bill. But both sides in the standoff, triggered by Republican efforts to halt Obama's healthcare reforms, appeared entrenched.

The Treasury said the United States could fall into its deepest recession since the Great Depression if Congress does not raise the $16.7 trillion cap on government borrowing soon.

The U.S. government spends a lot more than it takes in, so not raising the debt limit would leave it unable to pay all its bills, which range from pensions for the elderly to interest on money borrowed from China.

Default could lead borrowing costs for businesses and households to skyrocket, while stock prices might plunge.

"A default would be unprecedented and has the potential to be catastrophic," the Treasury said. "The negative spillovers could reverberate around the world."

Economists say the biggest risk is that America might miss debt payments, setting off panic on Wall Street.

Many analysts speculate that the Treasury would give preference to some bills over others in an attempt to keep that from happening, but a senior Treasury official told journalists on Thursday it would be impossible to prioritize payments on debt, as some Republicans on Capitol Hill have proposed.

The government shutdown that started on Tuesday has put hundreds of thousands of government employees out of work.

Default would be worse, however. The Treasury says that if Congress does not raise the statutory debt limit, it will run out of room to borrow by Oct. 17, at which time it will be down to its last $30 billion, which could be exhausted within weeks.

"No one knows with certainty how bad the consequences are if we cross the line," Treasury Secretary Jack Lew told the Fox Business Network.

The Congressional Budget Office expects the United States could start defaulting on at least some obligations between Oct. 22 and the end of the month. Large debt payments loom on Oct. 24 and Oct. 31.

THINKING THE UNTHINKABLE

Global financial leaders are concerned a U.S. crisis could slam economies across Europe, Asia, Africa and the Americas just as the world is making an uneven and uncertain recovery from the 2007-2009 recession.

U.S. Treasury debt, long deemed risk-free, is the foundation of the global financial system. Assets around the world use U.S. Treasuries as a benchmark for their value.

"It is mission-critical that this be resolved as soon as possible," IMF chief Christine Lagarde said in a speech. "Failure to raise the debt ceiling ... could seriously damage not only the U.S. economy but the entire global economy."

Concerns over America's political dysfunction are likely to dominate semi-annual meetings of the IMF next week in Washington, which will bring together finance ministers and central bankers from around the world.

Lew repeated the Obama administration's position that it will not negotiate with Republicans over the debt ceiling.

"We cannot be in a constant threat of shutting down the government or not paying our bills," Lew said. "We need to engage in meaningful negotiation and meaningful compromise. But we have to be done with this brinkmanship."

Investors are already startled. U.S. stocks fell nearly 1 percent on Wednesday and are down more than 2 percent since Sept. 18.

"There is a lot of uncertainty, it makes people very nervous. It creates a lot of, maybe, distrust about government's ability to actually lead this country," San Francisco Federal Reserve Bank President John Williams said in San Diego.

Williams warned of the risk of undermining of confidence in the U.S. economy and the dollar.

"Risking the U.S. Treasury market and the global trust in the U.S. Treasury market is very frightening," he said.

Christian Noyer, a member of the European Central Bank's Governing Council, said he could not imagine that the United States would default on its debts.

"We've got an event that is creating a risk for American growth, a serious risk if it lasts too long ... and given the importance of the American economy, a global risk," he said on BFM Business TV. "I don't dare imagine that will happen."

Dallas Federal Reserve Bank President Richard Fisher similarly said a default would be "unthinkable."

"The world - or, at least, our thinking about the world - is never the same again," he said.

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Comments (4)
Zaichik wrote:
“A senior Treasury official told journalists that favoring bills to creditors over others would be unworkable and the administration was completely opposed to this approach.”
Not doing so would be unconstitutional (Article 14, Section 4). Furthermore, Congress, not the Administration, has the right to enforce this provision (Section 5).

Oct 03, 2013 12:04pm EDT  --  Report as abuse
0ldRNCowboy wrote:
Many Americans live paycheck to paycheck and when one fails to materialize the result is ruinous. Now the liberal Democrats in Washington can experience this predicament up close and personal and in the public eye. If any good comes from this shutdown it will be a lesson in Economics 101: You cannot spend what you do not have.

Does anyone else feel any outrage over our nation’s addiction to spending, spending to the point where we, as a nation have less than three weeks of financial cushion?

Our current economic crisis rest squarely on the shoulders of this Administration. Period! Spending money it does not have leads to only one result, bankruptcy. A hard lesson usually learned by any young adult with a Sears credit card.

Oct 03, 2013 1:54pm EDT  --  Report as abuse
explorer08 wrote:
@ OldRNCowboy: but……didn’t the two wars prior to 2008 also dig us VERY VERY deeply into debt? Right wingers often conveniently forget history. Left wingers don’t forget history – - they just ignore it. But right wingers forget it completely.

Oct 03, 2013 4:15pm EDT  --  Report as abuse
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