Default Panic Would Be Worse Than Lehman

A U.S. debt default would cause panic throughout the financial system and long-term uncertainty, former Treasury Secretary Larry Summers told CNN.

“It seems to me an unthinkable financial risk to take,” Summers said in an interview on today’s “Fareed Zakaria GPS” program. It would cause “a cascade that makes Lehman Brothers look like a very small event.”

The bankruptcy of Lehman Brothers Holdings Inc. (LEHMQ) in September 2008 was the biggest in U.S history and was followed by a collapse of credit markets and a 43 percent decline in the S&P 500.

In 16 days, the U.S. will begin to default on its debt obligations unless Congress and President Barack Obama can agree on a deal to raise the debt ceiling. Obama has been trying to break an impasse over whether to include cuts in entitlement programs and tax increases in the deal.

Summers said a potential default makes him worry about “runs on banks, runs on money market funds,” exchanges facing “the prospect of collapse, institutions that had been built over decades” being “swept away.”

“The ability to carry on routine financial business -- to clear checks, to pay bills, to meet obligations would be lost,” he said.

“It would be a totally self-inflicted cataclysm,” he said. “There’s no question the United States can meet its obligations. This idea that somehow that we cannot pay because we’re having a political fight over how to handle the spending and taxing” is “democracy functioning in the worst possible way,” he said.

To contact the reporter on this story: Juliann Francis in Washington at jfrancis31@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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