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Moody’s Warns of ‘Devastating’ Consequences if the United States Defaults on Its Debts

Moody’s Warns of ‘Devastating’ Consequences if the United States Defaults on Its Debts

Moody’s Analytics warned in a dire report published on Tuesday that if Congress fails to fund the federal government and raise the debt ceiling, the blows to the American and global economies would be “devastating.” United States Treasury Secretary Janet Yellen has also rung similar alarm bells in recent days.

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The prospect of a partial government shutdown is looming large because the government will run out of money on September 30th, and by mid-October, the US will be unable to fulfill its obligations.

“Shutting the government down would not be an immediate hit to the economy, but a default would be a catastrophic blow to the nascent economic recovery from the COVID-19 pandemic. Global financial markets and the economy would be upended, and even if resolved quickly, Americans would pay for this default for generations, as global investors would rightly believe that the federal government’s finances have been politicized and that a time may come when they would not be paid what they are owed when owed it. To compensate for this risk, they will demand higher interest rates on the Treasury bonds they purchase. That will exacerbate our daunting long-term fiscal challenges and be a lasting corrosive on the economy, significantly diminishing it,” Moody’s said.

“The hit to consumer, business, and investor confidence would be severe,” the entity cautioned. “If the impasse over the debt limit lasts through all of November, the Treasury will have no choice but to eliminate a cash deficit of approximately $200 billion by slashing government spending. Annualized, this is equal to more than 10% of GDP. The economic blow would be devastating.”

The financial giant estimated that as many as six million jobs could be wiped out in the “unthinkable” event of a default. Additionally, the government would have to suspend or delay Social Security payments, veterans benefits, and other spending priorities. It could also trigger a stock market mega-crash that would “roil” worldwide markets.

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“This economic scenario is cataclysmic,” Moody’s chief economist Mark Zandi wrote in the report. “Based on simulations of the Moody’s Analytics model of the U.S. economy, the downturn would be comparable to that suffered during the financial crisis. That means real GDP would decline almost 4% peak to trough, nearly 6 million jobs would be lost, and the unemployment rate would surge back to close to 9% (see Table). Stock prices would be cut almost in one-third at the worst of the selloff, wiping out $15 trillion in household wealth. Treasury yields, mortgage rates, and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume. Even then, rates never fall back to where they were previously. Since U.S. Treasury securities no longer would be risk-free, future generations of Americans would pay a steep economic price.”

The full report is available here.

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