Debt ceiling battle could prompt new recession, Obama admin says

A U.S. government default on its obligations caused by Congress not raising the country's borrowing ceiling would have catastrophic effects on the economy, the Treasury Department warned Thursday. The warning came on the third day of apartial government shutdown, which was brought on by House Republicans' refusal to pass a budget bill free of amendments that would have delayed the Affordable Care Act. President Barack Obama has decided to skip his trip to Asia to stay in Washington and continue pressing for a budget bill that would reopen the government.

If Republicans in the House of Representatives continue such brinkmanship in the coming debt ceiling debate, the results could be devastating. But Thursday, House Republican leader John Boehner privately told lawmakers that he would not allow the nation to default, the New York Times reported.

With the government likely to exhaust its cash reserves around Oct. 17, the Treasury said being forced into nonpayment of any of its obligations — and, in particular, its debt — would spark turmoil in financial markets and possibly send the country back to a recession as deep as that of 2008-09. The consequences for the world economy could be grim as well. 

"In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth," the Treasury announced in a report.

"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," the report added.

President Barack Obama, speaking to an audience Thursday morning at a construction company in Rockville, Md., said that failure to raise the debt ceiling would result in an "economic shutdown," with consequences far worse than the current partial shutdown of the federal government — though he also admonished House GOP members for being "reckless" in causing the government to close, and said that Speaker John Boehner, R-Ohio, should stop blocking a vote on spending.

"The last time the House Republicans flirted with not raising the debt ceiling, our country took a bad hit," said Obama, referring to a 2011 showdown in Congress. "Our country's credit rating was downgraded for the first time, just like you'd be downgraded if you didn't pay your mortgage.

"This time they are threatening to force the U.S. government to default on its obligations for the very first time in history," Obama said of the House GOP.

The government is barely operating below the $16.7 trillion debt ceiling, using so-called extraordinary measures since May to meet a chronic deficit of about $60 billion a month.

Those measures will be exhausted by Oct. 17, leaving the Treasury with only a small amount of cash to meet payment obligations.

The Treasury said the impasse in Congress over passing a new budget and raising the debt ceiling had already tentatively affected markets, echoing the fight over raising the limit two years ago.

A senior Treasury official, speaking on condition of anonymity, told Agence France-Presse that even without a default, the 2011 debacle left "long-lasting scars" on the economy. The official cited a decline in household wealth, a fall in business confidence and a rise in loan rates for business and home buyers.

"Even the possibility of a default, that comes up through political brinksmanship, has the possibility of harming the economy," the official said.

The 2011 battle also saw the U.S. triple-A credit rating cut by Standard & Poor's, the financial services company.

The Treasury report included an ominous warning about the country's fate if Congress doesn't reach a deal: "Considering the experience of countries around the world that have defaulted on their debt, not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation."

The International Monetary Fund's managing director, Christine Lagarde, echoed the Treasury Department's warnings Thursday. Speaking at George Washington University to provide previews of World Bank and IMF meetings next week, Lagarde said it was "mission-critical" that the fight over the debt ceiling be resolved as soon as possible.

Al Jazeera with wire services