Debt-Cap Failure ‘Collective Insanity’: Citigroup

A U.S. debt default triggered by the failure of politicians to agree to raising the country’s debt ceiling would be an “act of collective insanity” with severe impact on assets prices and the global economy, according Citigroup Inc. (C) economists.

The prospect of a default by the U.S. government, while still remote, is no longer negligibly small, wrote Citigroup Global Markets economists led by Willem Buiter. A default would “severely” damage the country’s role as an international financial power and as provider of the world’s reserve currency, they said. The political division is so wide that there is little chance of a meaningful agreement on addressing the long- term debt problem any time soon, making a downgrade of the country’s AAA credit rating “likely.”

“A default because of a failure to raise the Federal debt ceiling would be an act of collective insanity,” Buiter, London-based chief economist for Citigroup, wrote in a note dated July 28. “The implications of even a technical U.S. default are likely to be severe both for the U.S. and the world economy, involving a widespread rise in public and private funding costs, a generalized fall in asset prices, and a large hit to economic growth.”

House Republican leaders scrapped a vote on the debt- ceiling bill Thursday night in Washington, indicating that Speaker John Boehner is short of votes needed to pass his bill amid a vow by Senate Democrats to defeat the measure. The delay fueled concern that a compromise by the two parties won’t be reached before the Aug. 2 deadline for a possible U.S. default.

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