Washington - With the US government about to hit its $14.3
trillion debt limit, Treasury Secretary Timothy Geithner has warned of
"catastrophic" consequences and a new recession if Washington is not
able to borrow more.
A divided Congress has run out of time to raise the debt
limit before Monday's deadline, forcing Geithner into an emergency reallocation
of funds so the government can meet its obligations, including payments to
Treasury bondholders.
Those measures are only expected to give the government
until August 2 before it will start defaulting on payments including those on
Treasury debt, an event that could trigger chaos in world financial markets.
"A default would inflict catastrophic, far-reaching
damage on our nation's economy, significantly reducing growth and increasing
unemployment," Geithner said in a letter to Democratic Senator Michael
Bennet.
The Obama administration and lawmakers are battling over how
to curb the mounting US debt, with Republicans refusing to increase the debt
limit without deep spending cuts.
In some of his most stark language to lawmakers so far,
Geithner said a default or missed payments would not only increase borrowing
costs for the US government but also for average Americans, businesses and
local governments.
"An increase in Treasury rates would make it more costly for a family to buy a home, purchase a car or send a child to college," he said.
"It would make it more expensive for an entrepreneur to borrow money to start a new business or invest in new products and equipment."
The world's biggest economy is recovering only gradually
after the 2007-09 financial crisis but some 13.7 million Americans are out of
work and higher gasoline and food prices are threatening to slow the recovery.
If Congress does not increase the borrowing cap by August,
Geithner will be forced to start choosing which payments to make first.
Missing or delaying payments on a host of obligations,
including those to businesses for goods and services and bond payments to
investors, would result in a massive and abrupt cut in federal spending and
aggregate demand, the letter warned.
"The abrupt contraction would likely push us into a
double-dip recession," Geithner said.
The US government bond market has so far remained calm about
the risk of a default. But Geithner and Federal Reserve Chairperson Ben Bernanke
have repeatedly urged Congress to act quickly to raise the debt limit.
The US government is borrowing approximately $125bn per
month. As of Thursday, the country was $38bn below the debt ceiling.