The US debt ceiling fight is a potential ‘financial catastrophe’

Expect financial market and economic chaos to ensue if US lawmakers don’t find a resolution on the debt ceiling this time around.

“If there was even a temporary default on the US debt, it would really be a financial catastrophe,” NYU professor and economist Nouriel Roubini told Yahoo Finance Live at the World Economic Forum (video above). “So if you default on the debt, domestic and foreign investors in the private sector are not going to buy your bonds, and you’ll have a spike in interest rates.”

Lawmakers took one step toward that scenario on Thursday.

The federal government officially reached its $31.38 billion debt limit. In turn, that triggered the Treasury Department to utilize its “extraordinary measures” to sidestep a debt default debilitating.

“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans and global financial stability,” US Treasury Secretary Janet Yellen wrote in a memo to the House of Representatives on Jan. 13.

Yellen said the Treasury’s extraordinary measures will likely be exhausted by early June, putting pressure on lawmakers to find a debt ceiling resolution that has proven challenging in the past.

The US famously lost its AAA credit rating for the time ever by S&P in early August 2011 amid a contentious debt ceiling debate that almost triggered a government shutdown.

Newly elected freshman Rep. George Santos (R-NY), facing a scandal over his resume and claims he made on the campaign trail, points to the ceiling of the House Chamber as he talks with Rep. Jim Jordan (R-OH) and Rep. Marjorie Taylor Greene (R-GA) during a 9th round of votes for the new Speaker of the House on the third day of the 118th Congress at the US Capitol in Washington, US, January 5, 2023. REUTERS/Evelyn Hockstein TPX IMAGES OF THE DAY

Newly elected freshman Rep. George Santos (R-NY) points to the ceiling of the House Chamber as he talks with Rep. Jim Jordan (R-OH) and Rep. Marjorie Taylor Greene (R-GA) during a 9th round of votes for the new Speaker of the House on the third day of the 118th Congress at the US Capitol in Washington, US, on January 5, 2023. REUTERS/Evelyn Hockstein

The S&P 500 (^GSPC) lost about 12% from early July 2011 through the end of August as investors voiced their concern on the country’s debt situation.

Roubini says officials need to avoid a similar situation at all costs, especially as the US economy contends with sluggish economic growth and stubbornly high inflation.

“It would be crazy and a total catastrophe for the US,” Roubini added on any potential debt default.

More Yahoo Finance coverage of Davos 2023:

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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