(Trends Wide Business) — Defaulting on US debt would be a “catastrophic blow” to the US economic recovery from COVID-19, triggering a recession that could well rival the Great Recession, Moody’s Analytics warns in a new report.
If the United States defaults on its debt payments and the situation continues, the recession that it would bring would end almost 6 million jobs and raise the country’s unemployment rate to almost 9%, Moody’s projects in a report published on Tuesday. .
The market crisis would lower share prices by a third, wiping out about $ 15 trillion in household wealth, according to the report.
“This economic scenario is cataclysmic,” wrote Mark Zandi, chief economist at Moody’s Analytics.
The US Treasury Department estimates that it will run out of cash sometime in October, unless Congress raises the debt ceiling. Despite the looming possibility of default, Republicans have refused to back an increase in the debt ceiling due, in part, to concerns about the Biden administration’s vast spending plans.
Moody’s notes that financial markets are not yet showing signs of fear over the debt ceiling increase issue, suggesting there is a widespread belief that Congress will eventually take action. The impact on Wall Street has been far less so far than during the defining moments of 2011 and 2013.
“Ironically, because investors seem so optimistic about how this drama will unfold, policy makers may believe they have nothing to worry about and will not resolve the debt cap on time,” Zandi wrote. “This would be an egregious mistake.”
Even a close situation could cost the economy and taxpayers.
Fears of a U.S. default in 2013 raised Treasury yields, costing taxpayers an estimated half a trillion dollars in additional interest costs, as well as making loans more expensive for families and businesses, according to Moody’s.
If Congress does not lift the debt ceiling and the Treasury begins to pay bills late and defaults, the markets would react very negatively.
“There is likely to be a TARP moment,” Zandi wrote, referring to the market crash in 2008 after Congress initially failed to pass the Wall Street bailout, then quickly reversed. [TARP se refiere al programa del gobierno implementado en 2008 para la compra de activos de instituciones financieras para hacer frente a la crisis de las hipotecas].
The worst case scenario, according to Moody’s, would be that Congress continues to fail to act to raise the debt ceiling and the stagnation is prolonged.
That would force the federal government to delay about $ 80 billion in payments due November 1, including those for Social Security recipients, veterans and the active duty military, according to Moody’s. If the crisis lasted until November, new and drastic spending cuts would have to be imposed.
Beyond the immediate hit to the US economy, a default will likely cast a shadow over the US for a long time.
“Americans would pay for this default for generations,” Zandi wrote, “as global investors would rightly believe that the finances of the federal government have become politicized and that there may come a time when they are not being paid what they are. you owe them when you owe them. “