THE WORLD faces an even worse recession than the ongoing financial crisis if the US congress fails to lift the country’s debt limit, top officials warned yesterday.
The US Treasury said yesterday if the current impasse over government spending is not resolved within a fortnight then it will have a “catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth”.
IMF chief Christine Lagarde echoed the warning, saying it is now “mission critical” that the US agrees a new debt ceiling at the earliest possible opportunities.
The US government has been partially shutdown since Tuesday after congress failed to agree a new Budget and the US government is set to run out of money on 17 October unless a solution is found.
Republicans in the House of Representatives are demanding concessions from President Obama and his fellow Democrats on public healthcare spending and other spending restraints before agreeing to lift the debt ceiling.
However, government officials warned that they are playing a dangerous game with potentially catastrophic side effects.
“Credit markets could freeze, the value of the dollar could plummet, US 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,” Treasury officials said.
US markets had shrugged off the first two days of the shutdown but yesterday’s interventions finally shook them into action, resulting in falls on key stock market indices, with the Dow Jones down 0.9 per cent and the Nasdaq down over one per cent . “As reckless as a government shutdown is, as many people as are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse,” the President said after the meeting.
Hundreds of thousands of government employees have been left without pay, leaving key public services unavailable as market-moving data has gone unpublished and national parks have been closed.
Today’s US non-farm employment figures – considered a key measure of the economy’s health – will not be released as planned due to the shutdown. Meanwhile, Mario Draghi, head of the European Central Bank, said the crisis is a risk “not only for the US, but also the world economy”.
Dallas Fed chairman Richard Fisher warned that a US default would be like the Great Depression: “If the US government defaults on its debt later this month, the unthinkable will have become real and the “full faith and credit” of the United States will be a mirage rather than accepted fact.”