U.S. Treasury Department said Thursday that a potential debt default would be catastrophic to the macroeconomy, as fears grew that the problem of government shutdown could be aggravated by a legislative showdown over the debt ceiling.
In a report on the potential effects of debt ceiling brinksmanship, the Treasury said the economic fallout of a debt default would echo the events of 2008 financial crisis, or even worse.
"Credit markets could freeze, the value of the dollar could plummet, and the U.S. interest rates could skyrocket," the report noted.
"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," said Treasury Secretary Jacob Lew.
The report noted 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, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression," said the report.
"The U.S. dollar and Treasury securities are at the center of the international finance system. 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 as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression."
It also stated 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.