WASHINGTON — A default would be unprecedented and would have the potential to be catastrophic, the Treasury Department warns in a paper issued Thursday.
"Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008," the Treasury said in the six-page paper, called "The Potential Macroeconomic Effect of Debt Ceiling Brinkmanship."
The paper was released as the federal government remains shut down and the current impasse over continued federal funding is spilling over into the debate over the debt limit, which currently stands at $16.7 trillion.
The federal government has taken extraordinary measures, since May, to avoid exceeding that amount. But Treasury Secretary Jacob Lew told Congress on Tuesday that those measures, which have included halting sales of state and local government series securities, will be exhausted on Oct. 17.
Issuers have been unable to buy SLGs, specially tailored securities that they put in advance refunding escrows to avoid violating arbitrage rules, since May.
The Treasury said that even if a default does not occur, the political brinkmanship that engenders the prospect of a default can be disruptive to the financial markets.
The closest historical precedent is the debt ceiling impasse in 2011, the department said.
At that time, consumer and business confidence fell sharply, the financial markets were stressed, and job growth slowed. U.S. government debt was downgraded, the stock market fell, measures of volatility jumped, credit risk spreads widened noticeably and these financial market effects persisted for months, the Treasury said.
"An additional consideration now is the government shutdown that started Oct. 1," Treasury said in its paper. "If the shutdown is protracted, the economy could be weakened, making expansion even more susceptible to the adverse effects from a debt ceiling impasse than prior to the shutdown.