Senior Treasury department officials have issued their starkest warnings yet that if Congress does not quickly raise the US debt limit to avoid a default, investors will punish the country and further damage its fiscal position.
“Certainly in the current context of the global recovery and other headwinds, this is not something we can afford to let happen or to let people think might happen,” Neal Wolin, deputy Treasury secretary, told the Financial Times. “We are talking about a unique and fragile asset of the US: the full faith and credit idea.”
In response to a letter from Michael Bennet, the Colorado senator, released on Saturday, Tim Geithner, Treasury secretary, warned that if the US halted, curbed or delayed payments to contractors, employees and bond investors, there would be a “massive and abrupt reduction in outlays and aggregate demand”.
It was likely this would push the US into a double-dip recession, he wrote, adding that even a short default could inflict “irrevocable” damage to the US economy. He copied Ben Bernanke, chairman of the Federal Reserve, and Jack Lew, White House budget director, in on the letter.
The potential for a default will move closer on Monday when the US reaches the $14,300bn borrowing limit mandated by Congress. Because of a series of special cash management measures, the Treasury has said it can delay a default until August 2, while bitterly divided Republicans and Democrats negotiate a deal to increase the debt ceiling.
Investors continue to have strong appetite for US debt, with the yield on the 10-year US Treasury bond reaching some of its lowest levels of the year last week. But Mr Wolin said this level of confidence might not last. “If we default, or if we get up to the witching hour of default and the markets punish us, [it] of course will be worse still for the intermediate and long-term future of the US because it will cost us more to fund the government.”
The warnings dismiss recent attempts by some congressional Republicans to play down the urgency of raising the debt limit on the grounds that the Treasury could push back the day of default by making interest payments its top priority. “The basic point is that the world will inevitably view this as a default – something that has never happened before,” Mr Wolin said.
Mary Miller, assistant Treasury secretary for financial markets, added: “For those who are advocating paying only interest, rolling over the outstanding debt underneath the debt ceiling and continuing auctions, my question would be: ‘Would the market be buying debt in the auctions while we are defaulting on other obligations?’ ”
Republicans are insisting on deep spending cuts and budget process reforms in exchange for a debt ceiling hike, a position that John Boehner, speaker of the House of Representatives, restated on CBS’s Face the Nation programme on Sunday, declaring there is a “window of opportunity” to make needed changes.