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Debt ceiling 101: 12 questions about what's going on

The US Treasury has warned that as early as Oct. 17 it will no longer be able to cover all the government's rising financial obligations. Here’s your guide to the debt limit deadline and its implications.

12. What would a default mean for the US and world economy?

Henny Ray Abrams/AP/File
Standard & Poor's downgraded its credit rating for US debt after the last debt-ceiling crisis.

Economists widely agree that the effects of a debt default – or even of the Treasury failing to meet billions of dollars in ordinary obligations – would be swift and severe. It’s hard to know just how severe because, again, this hasn’t been tested before by the world’s leading economy.

Interest rates would rise as investor confidence is shaken, and the Treasury would face the prospect of downgrades by credit-rating firms. The squeeze on federal spending (imposed by the borrowing cap) would deal a blow to economic activity equaling about 4 percent of GDP, some forecasters estimate.

The stock market could plunge, and consumer confidence along with it.

The toll in the US would have global fallout as well, pushing up interest rates and squeezing economic growth.

Even if Congress goes near this cliff and then raises the debt limit by Oct. 17, the brinkmanship could have noticeable consequences. In 2011, when Congress got close to the edge before cutting a deal, Standard & Poor’s gave US sovereign debt a downgrade. Mortgage costs jumped and consumer confidence sagged. Stock prices overseas fell alongside US stocks.

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Mark Sappenfield
Editor

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