Avoiding U.S. Default Might Mean Recession

Treasury would cut other government spending to meet interest payments on U.S. debt.

The U.S. Treasury has the means to avoid a debt default even if Congress fails to raise the government’s $16.7 trillion borrowing limit. The bad news is that it can’t prevent a recession.

Economists at Goldman Sachs Group Inc., IHS Inc. and BNP Paribas SA said they expect the Treasury to husband the tax money it collects to make sure it can meet interest payments on the nation’s debt. Other obligations, from salaries of government workers to payments to defense contractors, would face the ax. The result: $175 billion less in government spending during November alone, said Goldman’s Alec Phillips in Washington.

Investor Reaction

Investors in financial markets are starting to take notice as the deadline approaches. The Standard & Poor’s 500 Index slipped 1.2 percent to 1,655.45 at 4 p.m. in New York yesterday for its biggest drop since August.

Forecast Reduced

Consultant IHS already has reduced its forecast for economic growth in the fourth quarter to 1.6 percent from 2.2 percent to reflect a partial government shutdown that began on Oct. 1 after Congress failed to authorize government spending for the new fiscal year, said Behravesh.

Prioritizing ‘Unworkable’

Treasury officials have suggested that a strategy of segregating debt payments isn’t feasible. Lew said in a Sept. 17 speech in Washington that proposals for “prioritization,” or making some payments instead of others, are “unworkable.”

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