Daily Mail

US debt disaster ‘would be worse than Lehman’

- by James Burton

Political turmoil in Washington could trigger a debt crisis in the United States that would be more devastatin­g to the global economy than the collapse of lehman Brothers, a credit agency has warned.

the US government will hit a socalled ‘debt ceiling’ by the end of September unless congress agrees to raise the limit on what the country can borrow on global markets.

Without an agreement, the nation will no longer have permission to borrow any fresh cash, raising the prospect of a catastroph­ic default.

President Donald trump must also win backing for a new spending bill by the end of September – or face a government shutdown that would see all but the most essential services suspended and staff go unpaid.

although the administra­tion is likely to be able to stagger on for another few weeks after the debt ceiling is reached, it is feared a protracted impasse could lead to one of the biggest defaults in history.

analysts at Standard & Poor’s have warned the shock would be worse than when the lehman bank collapsed in 2008. that was the moment the financial crisis spiralled out of control, costing millions their jobs, homes and savings in Britain and elsewhere.

S&P’s chief american economist Beth ann Bovino said: ‘the economy would fall back into recession, wiping out much of the progress made by the recovery.’

Even the US treasury’s website admits failure to raise the debt ceiling would have ‘catastroph­ic economic consequenc­es’.

‘it would cause the government to default on its legal obligation­s – an unpreceden­ted event in american history,’ it says. trump’s Republican party controls both houses in congress, meaning the chances of a fall-out are low. However, the president has threatened to refuse any increase in spending unless it includes money for a controvers­ial border wall with Mexico.

Many lawmakers will never support the wall, setting the stage for a huge battle of wills.

Bovino said a default would trigger a ‘sudden, unplanned contractio­n of current spending’ by the government equivalent to 4pc of economic output – or around £580bn. Failure to agree a spending rise would trigger a government shutdown, meaning nearly 1m public sector staff would go unpaid and crucial services would stop.

consumer confidence and contractin­g firms would also take a massive hit. overall, S&P estimates this could cost the american economy £5.1bn a week.

Barclays analysts also fear the debt ceiling being breached, saying it would ‘likely push the economy into recession’.

there were similarly dire warnings in 2011 and 2013, when the government last came close to hitting the debt ceiling.

S&P fears recent political turmoil, coupled with questions over the president’s competence, could lead to an unexpected impasse which triggers a default.

‘Betting on a rational US government can be risky,’ Bovino said. ‘We continue to see the likelihood of a shutdown in late September as slim [but] the risks are increasing, with the costs high.’

Goldman Sachs said the chance of shutdown had fallen from 50pc to 35pc due to Hurricane Harvey.

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