If Congress fails to raise the debt ceiling and the United States government defaults on its obligations, credit markets could freeze, the value of the dollar could plummet and U.S. interest rates could skyrocket, according to a new report by the Treasury Department.
Treasury secretary Jack Lew has been warning Congress that Treasury will exhaust its borrowing authority sometime after Oct. 17.
During the last confrontation in August 2011 over increasing the debt ceiling, rates on Treasury securities were held down due to the sovereign debt crisis in Europe.
However, mortgage rates jumped as the spreads between Treasury rates and the interest rate on the 30-year FRMs widened dramatically.
“In the late summer of 2011, the 30-year conventional fixed mortgage spread jumped by as much as 70 basis points and wider spreads lasted into 2012,” the report says.
Fortunately, the debt-ceiling stand-off in 2011 was resolved before Treasury exhausted its borrowing authority.
In today’s market, such “political brinkmanship” would likely push up rates on Treasury securities. That would “result in higher mortgage rates that would restrain the housing market and household spending,” according to the Treasury report. And a protracted
House Financial Services Committee chairman Jeb Hensarling, R-Texas, said only Democrats are talking about default.
“We will never default on our nation’s sovereign debt,” he said in response to the Treasury report. “This debate has been and always will be about our fiscal priorities, not default. We can no longer wait until tomorrow to deal with today’s spending-driven debt crisis.”
