Recession looms if Treasury uses tools to prevent a debt default

The U.S. Treasury has the means to avoid a debt default even if Congress fails to raise the government’s $16.7 trillion borrowing limit. The bad news is that it can’t prevent a recession. More

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Recession looms if Treasury uses tools to prevent a debt default

BLOOMBERG FILE PHOTO/ANDREW HARRER
ACCORDING TO TREASURY SECRETARY Jacob J. Lew, the United States will run out of money to pay its bills no later than Oct. 17. Although the U.S. Treasury has the means to avoid a debt default even if Congress fails to raise the debt ceiling, economists say it cannot prevent the recession likely to result.
Posted 10/9/13

WASHINGTON - The U.S. Treasury has the means to avoid a debt default even if Congress fails to raise the government’s $16.7 trillion borrowing limit. The bad news is that it can’t prevent a recession.

Economists at Goldman Sachs Group Inc., IHS Inc. and BNP Paribas SA said they expect the Treasury to husband the tax money it collects to make sure it can meet interest and principal payments on the nation’s debt. Other obligations, from salaries of government workers to payments to defense contractors, would face the ax. The result: $175 billion less in government spending during November alone, said Goldman’s Alec Phillips in Washington.

“The cutting would be so huge it would put the U.S. back into recession,” said Jim O’Neill, former chairman of Goldman Sachs Asset Management who is now a Bloomberg View columnist.

Treasury Secretary Jacob J. Lew has said the “extraordinary measures” he uses to avoid breaching the debt limit will be exhausted no later than Oct. 17. He said the Treasury will then have about $30 billion on hand, while net expenditures can be as high as $60 billion on some days.

That would leave the government unable to pay all its bills. The Treasury typically takes in about $7 billion daily in income and payroll taxes, though those amounts can vary significantly from day to day, the Congressional Budget Office said in a Sept. 25 report.

Exploring contingencies

“We are exploring all contingencies,” President Barack Obama told a press conference yesterday, when asked about the possibility of prioritizing payments to make sure the government meets its debt obligations.

He argued though that the country’s creditworthiness still would be damaged if it failed to pay some of its other bills as they came due.

The chances that the U.S. won’t raise its borrowing limit by the Oct. 17 deadline are “very low,” probably less than 5 percent, said Nariman Behravesh, chief economist for IHS in Lexington, Mass. The costs of not doing so and defaulting are just too high.

“The financial ramifications would be horrific,” worse than what followed the 2008 collapse of Lehman Brothers Holdings Inc., he said. The U.S. stock market lost almost half its value in the five months following Lehman’s failure and the country plunged into its worst recession since the Great Depression.

Investor reaction

Investors in financial markets are starting to take notice as the deadline approaches. The Standard & Poor’s 500 Index slipped 1.2 percent to 1,655.45 at 4 p.m. in New York yesterday for its biggest drop since August.

Rates on Treasury bills due on Oct. 31 climbed to 0.34 percent from zero as recently as Sept. 19. That compares with a 0.11 percent rate for bills maturing on Oct. 10.

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