Zandi: Debt default would trigger recession

Zachary Roth
June 28, 2011

If the United States defaults on its debt, the country is likely to suffer a double-dip recession, according to one prominent economist.

"I think if we get to August 2nd and there is no debt ceiling [increase] ... we'll probably be thrown into a recession," Mark Zandi of Moody's Economics told reporters this morning, Talking Points Memo reports.

Republicans are currently demanding enormous spending cuts--and no tax hikes--before agreeing to raise the federal government's limit, a stance Democrats and the White House won't accept. If the two sides can't make a deal before that date, the Unite States would likely either default on payments it owes to creditors, or it would have to stop paying contractors and entitlement recipients. Either way, a failure to raise the debt ceiling would cause a huge slowdown that would send the already-fragile economy back into a contraction.

Speaking at a breakfast event organized by the Christian Science Monitor, Zandi said that by contrast, if the ceiling is raised, he expects growth of roughly 4 percent going into next year--a more optimistic prediction than one made by the federal Reserve recently. If borne out, that forecast would likely be enough to sustain a recovery and begin making a dent in the unemployment rate, currently at 9.1 percent.

The Great Recession officially lasted from December 2007 until June 2009, but since then the economy has grown slowly. And a string of bad economic news in recent months has raised fears that the economu could dip back into recession.

Zandi--who has worked with both Democratic and Republican politicians in recent years--appeared to say he expected to see a deal. He noted the price of insurance for the default of a U.S. Treasury bond is already starting to rise, and added that as the the deadline for action on the ceiling approaches on August 2, the markets will start to reflect investors' nervousness even more clearly. That, he said, will prompt a "TARP moment" for policymakers, in which they'll understand that a default could have catastrophic consequences.

Debt limit aside, Zandi said the recovery--such as it is--is extremely fragile, and could be knocked off course by any of a number of events, from further oil price spikes to more bad news on the housing front. "As I talk to business people in every industry across the country they're extraordinarily nervous," he said. "And that's why if anything goes slightly wrong, the economic consequences, the negative consequences, are amplified."

He added: "People are so nervous, and they freeze when things go badly."

(Mark Lennihan/AP)