US default could trigger recession, disrupt critical govt services: Yellen

WASHINGTON: US Treasury Secretary Janet Yellen on Tuesday warned that a default on government debt would likely leave millions of Americans without income payments, potentially triggering a recession that could destroy many American jobs and businesses.

Yellen told a gathering of community bankers that the unprecedented economic and financial crisis would be exacerbated by possible disruptions to the federal government’s operations, including air traffic control, law enforcement, border security and national defense, and telecommunications systems.

The accompanying financial crisis could multiply the severity of the downturn, she said in remarks prepared for delivery, adding, “It is very conceivable that we’d see a number of financial markets break - with worldwide panic triggering margin calls, runs and fire sales.”

Yellen on Monday told Congress the Treasury expects to be able to pay the US government’s bills only through June 1 without a debt limit increase, heaping pressure on Republicans in Congress and the White House to reach a deal in coming days. Failure to reach a deal would result in severe economic and financial consequences, she said.

“Our economy would suddenly find itself in an unprecedented economic and financial storm,” she said, adding that 66 million Social Security beneficiaries and millions of veterans and military families would likely go unpaid. “And the resulting income shock could lead to a recession that destroys many American jobs and businesses,” she said.

Yellen said the standoff over the federal debt limit is already driving borrowing costs higher and adding to the country’s debt burden, and urged Congress to avoid the “eleventh-hour brinkmanship” over the debt ceiling in 2011 that led to the first-ever downgrade of the US credit rating.