Geithner Says Default Damage May Be ‘Irrevocable’
U.S. Treasury Secretary Timothy F. Geithner said a default arising from failing to raise the debt limit could cause “irrevocable damage” to the economy, risk a “double-dip” recession and increase unemployment.
“Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments -- reducing investment and job creation throughout the economy,” Geithner said in a letter dated yesterday to Senator Michael Bennet, a Colorado Democrat.
Failing to raise the $14.29 trillion debt ceiling would “force the United States to default” on obligations such as payments to service members, citizens, investors and businesses, Geithner wrote. “This would be an unprecedented event in American history. A default would inflict catastrophic, far- reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment.”
The U.S. is scheduled to reach the debt limit May 16 and can keep borrowing until about Aug. 2 by taking steps that include declaring a “debt-issuance suspension period” under the statute governing the Civil Service Retirement and Disability Fund, Geithner said May 2. That would allow the U.S. to redeem existing Treasury securities held by that fund as investments.
Democrats and Republicans are debating how much to trim the deficit and whether to extend the debt ceiling. Senate Minority Leader Mitch McConnell, a Kentucky Republican, said May 12 he wants “significant” near-term cuts in federal agency budgets paired with longer-term reductions to programs like Medicare and Medicaid in exchange for his support for an increase in the debt limit.
“Even a short-term default could cause irrevocable damage to the American economy,” Geithner said in response to a letter from Bennet requesting an estimate of the consequences of failing to increase the limit.
Raising the debt ceiling “does not authorize new spending commitments,” Geithner said. “It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.”
In response to Geithner’s letter, Bennett said it was “absolutely urgent and essential” that lawmakers draft a plan that “materially reduces the deficit.”
Still, “playing politics with the debt limit would rattle the capital markets, blow an even bigger hole in our deficit and would likely throw our economy into another deep recession,” he said in an e-mailed statement.
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