(MENAFN - AFP) The US Treasury warned Thursday of a disastrous outcome if Congress's refusal to raise the country's borrowing ceiling forces it to default on obligations.
It said that the fallout could include returning to a recession as deep as that of 2008-2009, if its borrowing power is not increased by October 17, when it forecasts the government will exhaust its cash and be unable to pay all its bills.
"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," the Treasury said in a report.
"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."
The warning sent shudders through markets, with US stocks sinking Thursday, as the government passed the third day of a dramatic shutdown due to Congress's stalemate over a new budget.
That battle appeared more and more likely to be subsumed by a tense fight over the debt ceiling, and the Treasury warned strongly against "brinksmanship" that could carry the fight to or past the 17th.
"As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy," Treasury Secretary Jacob Lew said in a statement.
"Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need -- a self-inflicted wound harming families and businesses."
The government is already just barely operating below the 16.7 trillion ceiling on the back of "extraordinary measures" carried out since May to meet a chronic deficit of about 60 billion a month, according tot he Treasury.
Those measures will be exhausted by October 17, leaving the Treasury with only a small amount of cash to meet constant payment obligations.
It said that the impasse in Congress over passing a new budget and raising the debt ceiling was already unnerving markets, echoing the fight over raising the limit two years ago.
The July-August 2011 battle went to the brink of default and, though that did not happen, still saw the US triple-A credit rating cut by Standard & Poor's.
A senior Treasury official, speaking on condition of anonymity, said that even without a default, the 2011 debacle put "long-lasting scars" on the economy.
The official cited a decline in household wealth, a fall in business confidence, and a rise in loan rates for business and home buyers.
"Even the possibility of a default, that comes up through political brinksmanship, has the possibility of harming the economy."
The official said that by October 17 the Treasury will have only 30 billion in cash on hand and facing payment requirements that sometimes top 60 billion in one day.
So far that is not affected by the government shutdown which began on October 1, after Congress failed to agree on a funding bill for the new 2014 fiscal year, the official said.
But the official would not detail just what kind of obligations the Treasury would first be forced to renege on when its cash pile expires -- debt service, retirement benefits, health care services, or other regular payments.
"Forecasting this, the payments, is difficult, particularly in this environment, with the government shut down in the first place."
"The only way out of this is for Congress to act," the official said. "There are absolutely no good options."