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WASHINGTON. — The political crisis gripping Washington could trigger a “catastrophic” US debt default, the Treasury warned yesterday, as America limped into day three of a government shut-down.
Despite the looming danger to the US and world economies, there was no sign that either President Barack Obama or his Republican foes were ready to give ground.
“There’s one way out of this reckless and damaging Republican shut-down. Congress has to pass a budget that funds our government with no partisan strings attached,” Obama declared.
“Take a vote, stop this farce and end this shut-down right now,” Obama said, in a fiery speech in the Washington DC suburbs. At midnight on Monday the US federal government ran out of funding after Congress, divided between a Republican-led lower House and Democratic Senate, failed to pass a stop gap budget measure. Hundreds of thousands of government workers have been sent home, federal agencies have halted all but the most critical operations, parks and monuments have closed and scientific research is on hold.
Now, another threat looms, after Republicans warned that they would not approve an increase in the federal government’s debt cap without receiving concessions in the budget debate.
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. World financial markets would be rocked and the crisis could plunge the United States into deep recession, a Treasury report said.
“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,” it said.
“Credit markets could freeze, the value of the dollar could plummet, US interest rates could sky-rocket, 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 operating just barely below the US$16.7 trillion debt ceiling, using what it calls “extraordinary measures” since May to meet a chronic deficit of about US$60 billion a month. Those measures will be exhausted by October 17.
Conservative Republicans want to dismantle or amend Obama’s health care law as a condition for approving interim funding for the new fiscal year, which began Tuesday. The president is refusing to tinker with the law, his signature health care reform widely known as “Obamacare” and there is no end to the crisis in sight.
The prospect of feuding lawmakers remaining deadlocked over whether to raise US borrowing authority has international markets and groups like the International Monetary Fund fretting. IMF chief Christine Lagarde warned yesterday that a US failure to raise the debt ceiling, which could lead to default, could wreak havoc on the global economy.
“The ongoing political uncertainty over the budget and the debt ceiling does not help,” Lagarde said in a speech in Washington, on the third day of a US government shut-down due to a budget impasse in a bitterly divided Congress.
“The government shut-down is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy,” she said, according to her prepared remarks.
“So it is ‘mission-critical’ that this be resolved as soon as possible,” she added. Lagarde, in the speech at George Washington University ahead of the IMF/World Bank annual meetings next week, reiterated the Fund’s concerns about US fiscal policy’s dampening effects on the world’s largest economy. She highlighted the “sequester” drastic spending cuts stemming from the fight between Democrats and Republicans over the budget and entitlement programs.
“I have said many times before that the US needs to ‘slow down and hurry up’ by that I mean less fiscal adjustment today and more tomorrow.
That means replacing the sequester with more back-loaded measures that do not hurt the recovery,” Lagarde said.
“At the same time, the US needs to do more to make debt sustainable down the road by containing the growth of entitlement spending and raising revenues.” — AFP.
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