The US government went on partial shutdown this Monday after the
Democratic-led Senate turned down repeated efforts by the
Republicans to pass a budget, constraining the implementation of
‘Obamacare’ — a healthcare law, which the president considers a
centerpiece of his political legacy.
If the Congress fails to raise the $16.7 trillion federal
borrowing limit by October 17, the government could begin running
out of money to pay its bills, which would result in an
unprecedented US debt default.
“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 – with many private-sector analysts believing
that it would lead to events of the magnitude of late 2008 or
worse, and the result then was a recession more severe than any
seen since the Great Depression,” the Treasury said in a
report on Thursday.
The consequences of the default, which include high interest
rates, reduced investment, higher debt payments, and slow
economic growth, would also be sustainable and “could last for
more than a generation,” the department warned.
The Treasury said the “we may be starting to see some
tentative signs that the current debate is affecting financial
markets,” with the crisis already shaking the Wall Street
where the Dow Jones Industrial Average dropped 136.66 points
(0.90 per cent) to 14,996.48 on Thursday.
The Treasury also noted that the negative spillovers from an
“unprecedented” US default would “reverberate around the world”
as “credit markets could freeze, the value of the dollar could
plummet, US interest rates could skyrocket.”
The International Monetary Fund has also sounded the alarm over
the American debt crisis, which is putting the world economy
IMF chief Christine Lagarde stressed that it is “mission
critical” to urgently find the way out of the stalemate — as
she arrived in Washington for the next week’s IMF and World Bank
“The ongoing political uncertainty over the budget, over the
debt ceiling doesn’t help. The government shutdown is bad enough,
but failure to raise the debt ceiling would be far worse and
could very seriously damage not only the US economy, but also the
entire global economy,” she said.
According to Lagarde, the economic growth in the US has already
been hurt by excessive fiscal consolidation, and will be below 2
percent this year before rising by about 1 percentage point in
Congressional action remains the only way to avoid the US
default, an unnamed Treasury official told the reporters.
He stressed that the Treasury Department has no plans of using
the Constitution’s 14th Amendment, which says that the validity
of the US public debt “shall not be questioned,” to get
around the debt limit.
But there are no signs that the budget dispute will be solved
before being dragged into a second week, with all of the
government’s non-essential workers sent home due to the
Obama has refused to negotiate on raising the debt ceiling with
the Republicans, saying that offering concessions would set a
poor precedent for future heads of the White House.
“If we screw up, everybody gets screwed up. The whole world
will have problems,” he said in his emotional speech on
Thursday, adding that the debt default would throw the US economy
back into a recession.
The president stressed that Republican House Speaker John Boehner
could bring the government back to work “in just five
minutes” by passing a temporary operating budget, but he’s
not doing it because “he doesn’t want to anger the extremists
in his party.”
“Take a vote, stop this farce and end this shutdown right
now,” he urged the Republicans.
Meanwhile, the Congress may pass a measure on Friday, which will
see federal workers receive back pay for the period when they’ve
been out of the office due to government shutdown.
Members of the House of Representatives and Senate have filed
bills that would ensure all federal employees receive retroactive
pay for the duration they’ve been off work.