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US Treasury warns of harm from debt default

WASHINGTON (AP) — The U.S. Treasury Department warned Thursday that the economy could plunge into a downturn worse than the Great Recession if Congress fails to raise the federal borrowing limit and the country defaults on its debt obligations.

A default could cause the nation’s credit markets to freeze, the value of the dollar to plummet and U.S. interest rates to skyrocket, according to the Treasury report.

Treasury officials hope by laying out potential consequences they will be able to bring pressure on Congress to act. Treasury Secretary Jacob Lew has said he will have used up the extraordinary measures at his disposal for avoiding a breach of the debt ceiling by Oct. 17. After that, the government will have around $30 billion of cash on hand.

The report looked at the disruptions caused to financial markets during a similar standoff between the administration and Congress over raising the debt limit. It then made projections about what could occur if there were an actual default.

In August 2011, Congress eventually raised the nation’s borrowing limit before a default occurred but only after a protracted debate. The politics that nearly led to a default prompted Standard & Poor’s to cut the nation’s credit rating by a notch.

“As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy,” Lew said in a statement. “Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need — a self-inflicted wound harming families and businesses.”

In an interview with the Fox Business Network, Lew said that Oct. 17 was “a very real deadline” at which time Treasury will run out of the ability to borrow to run the government. Lew said after that “we will run down our cash very quickly.”

Private economists said that Treasury’s report did not overstate the potential fallout if Congress doesn’t raise the current $16.7 trillion borrowing limit and the government defaults on its debt payments.

“There is no doubt in my mind that a default would be cataclysmic,” said Mark Zandi, chief economist at Moody’s Analytics. “It would cost us for generations to come because bond holders would require higher interest rates.”

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