An extended government shutdown could make the American economy “even more susceptible” to adverse effects from a debt ceiling impasse, officials at the Treasury Department warned in a report released Thursday, saying that default, which will happen Oct. 17 without congressional action, “would be unprecedented and has the potential to be catastrophic.”
Treasury officials warn that the combined effects of a federal default could lead to a financial crisis and recession “that could echo the events of 2008 or worse,” with the potential for freezing of credit markets, a plummeting dollar and rising interest rates.
Even the prospect of a default can be disruptive, said the Treasury experts, who wrote that the debt ceiling impasse in 2011 brought stock market losses and higher volatility, a government debt downgrade, and wider credit risk. During the 2011 standoff, the S&P 500 index fell 17% and did not recover to its average level until 2012.
“It will have an incredibly negative effect on the markets,” said Judd Gregg, CEO of the Securities Industry and Financial Markets Association, in a news conference call Friday. Mr. Gregg, a former U.S. senator, said congressional negotiators are paying closer attention to the risks associated with a default. “I personally am encouraged by the language that is now being heard,” he said.
“Things are moving away from a default. Key players have made it clear they're not going to accept a default. I actually think the smoke is clearing in this direction,” Mr. Gregg said.