Geithner warns of new recession without debt rise

With the 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, dated Friday, to Democratic Senator Michael Bennet.

The Obama administration and lawmakers are battling over how to curb the mounting U.S. 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 U.S. 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 U.S. government bond market has so far remained calm about the risk of a default. But Geithner and Federal Reserve Chairman Ben Bernanke have repeatedly urged Congress to act quickly to raise the debt limit.

The U.S. government is borrowing approximately $125 billion per month. As of Thursday, the country was $38 billion below the debt ceiling.

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