Debt ceiling doomsday scenario

What happens if Congress fails to raise the debt limit and the U.S. can no longer make payments on its obligations?

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“Default by the United States is unthinkable,” U.S. Treasury Secretary Timothy F. Geithner wrote in a letter in April to leaders on Capitol Hill. “This is not a new or partisan judgment; it is a conclusion that has been shared by every Secretary of the Treasury, regardless of political party, in the modern era.” A default, Geithner warned, “would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

Daniel Acker / Bloomberg

U.S. government defaults: A broad range of payments would have to be stopped, limited or delayed, ranging from obligations to foreign creditors to military salaries, Social Security and Medicare payments, interest on debt, unemployment benefits and tax refunds. President Obama greets military personnel at Camp Victory in Baghdad in April 2009

Charles Dharapak / AP

Higher interest rates and borrowing costs: Because the U.S. would be perceived as a much more risky investment, interest rates and borrowing costs would skyrocket.

Jason Reed / Reuters

Credit rating downgraded: Moody’s, S&P and others would likely downgrade their outlook for the U.S. to negative, effectively killing the U.S.’s long-held reputation as a haven for investments.

Frank Franklin II / AP

Foreign creditors dump U.S. securities: Countries like China and Japan that are the biggest creditors to the U.S. with trillions in government holdings may sell them off en masse because they would see the investments as unstable. President Obama, left, listens to Chinese President Hu Jintao, as they attend a state dinner reception at the Great Hall of the People in Beijing in 2009.

Pablo Martinez Monsivais / AP

The dollar devalues: The U.S. dollar would lose its position as the world’s reserve currency as it the Treasuries market descends into turmoil.

Andrew Harrer / Bloomberg

GDP drops: If the debt ceiling is not raised, the U.S. would have to slash spending, resulting in a decline in economic activity. Within two months, the nation’s GDP could experience a bigger drop than that experienced during the recession of 2008, according to Michael Ettlinger at the Center for American Progress. Container ships are docked at terminals it Port Elizabeth, N.J.

Mark Lennihan / AP

Shrinking retirement savings: As a result of the financial chaos, ordinary Americans would find that their retirement savings are worth less than they were before the U.S. went into default.

Linda Davidson / The Washington Post

Falling home values: Mortgage interest rates would climb, bringing new home sales to record lows and possibly causing the still-fragile recovery in the housing market to collapse. A foreclosure sign is posted outside of a home in Loganville, Ga.

CHRIS RANK / Bloomberg

Firesale of U.S. financial assets: The Treasury may have to sell off assets it doesn’t want to such as a portion of the nation’s gold.

Yuriko Nakao / Reuters

U.S. descends into recession or even depression: Analysts at Bank of America have warned that if the debt ceiling isn’t raised the U.S. would find itself tipped back into recession. In this 1932 file photo, long line of jobless and homeless men wait outside to get free dinner at New York's municipal lodging house during the Great Depression.

/ AP

Panic in world financial markets: If the U.S. is no longer a haven, maybe no where else is either. Here the Dow Jones ticker in Times Square displays news about financial markets in New York on Oct. 10, 2008. U.S. stocks sank, capping the worst week ever for the Standard & Poor's 500 Index, on concern the escalating credit crises will snuff out consumer spending.

Jeremy Bales / Bloomberg

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