Oct. 3 (Bloomberg) -- A U.S. government default caused by Congress failing to raise the $16.7 trillion federal debt limit "has the potential to be catastrophic," the Treasury Department said in a report today.
"Even the possibility of a default could lead to sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence," according to the Treasury. "In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression."
The Obama administration and Republicans in Congress are at an impasse over ending a partial government shutdown that began Oct. 1 and on raising the debt ceiling. The first face-to-face talks between President Barack Obama and congressional leaders yesterday failed to break the logjam.
"The U.S. dollar and Treasury securities are at the center of the international financial system," the Treasury said in its report. "A default would be unprecedented and has the potential to be catastrophic: 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 or worse."
So far, the financial-market response to the political gridlock has been muted. The Standard & Poor’s 500 Index was at 1,685.22 today compared with 1,681.55 on Sept. 30, the yield on the 10-year Treasury note has risen 2 basis points to 2.63 percent, and the Dollar Index has slipped 0.4 percent.
Treasury Secretary Jacob J. Lew has said the Treasury projects that it will exhaust its "extraordinary measures" to stay under the debt limit by no later than Oct. 17 and will then have about $30 billion in cash on hand.
Postponing a debt-ceiling increase "to the very last minute is exactly what our economy does not need," Lew said in the report.
Obama also met yesterday with financial-industry executives including Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein and JPMorgan Chase & Co. CEO Jamie Dimon. Blankfein said after the meeting that lawmakers are risking the economic recovery if they don’t raise the debt limit. The meeting was part of an effort by the Obama administration to leverage the business community’s clout in breaking the stalemate.