THE US Treasury Department and the IMF have warned that if the US does not resolve its current crisis, it will unleash a global economic catastrophe that will be much worse than the world-wide financial collapse of 2008.
The US government has been shut down since midnight Monday because the Democrats and Republicans failed to agree a budget.
This forced authorities to send over 700,000 workers home on unpaid leave, leaving museums, monuments, national parks, government buildings and services indefinitely shut down.
The current shutdown is costing the US economy an estimated $300m a day, but a worse problem looms: the US will breach its borrowing limit of $16.7tn (£10.3tn) by the 17th October, threatening a default on US debt.
The US Treasury report stated: ‘A default would be unprecedented and has the potential to be catastrophic: 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.’
Christine Lagarde, head of the International Monetary Fund (IMF), said that failing to raise the ceiling would send shockwaves across the entire global financial system.
She said: ‘The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy. So it is “mission-critical” that this be resolved as soon as possible.’
US stockmarkets have already begun to fall. The Dow Jones fell 136 points on Thursday, breaching the all-important 15,000 benchmark.
The US treasury report continued: ‘Not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.
‘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 US came close to default during a similar political crisis in 2011. That stand-off prompted a first-ever downgrade of the country’s credit rating.
US President Obama made a speech in the Maryland suburb of Rockville, which is home to many federal workers laid off in the shutdown.
Obama, blaming the Republicans for the current crisis, said: ‘Take a vote, stop this farce and end this shutdown right now.’
The Republicans say that they will only agree the federal budget and raise the debt ceiling if Obama’s healthcare reforms are scrapped.
Obama has cancelled his trip to Asia because of the developing crisis.
Fearing the worst, Obama said: ‘As reckless as a government shutdown is, as many people as are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse.’
Meanwhile, the impact of the shutdown was being felt across the country.
The National Transportation Safety Board did not send investigators to a deadly church bus crash in Tennessee that killed eight people and injured 14 others.
The Labor Department also said it did not release the highly anticipated September jobs report on Friday because the government remains shut.