(Photo by Stefani Reynolds / AFP) (Photo by STEFANI REYNOLDS/AFP via Getty Images)
- A US debt default or even a near-nonpayment could send the US economy into recession, says Goldman Sachs' top economist.
- Any doubts on the US government's ability to pay back its debt could have "very adverse consequences," he said.
- The US has reached the $31.4 trillion borrowing limit, forcing the Treasury to step in with "extraordinary measures."
A US debt default or even a near-nonpayment could spark a recession in the economy, according to Goldman Sachs' top economist.
"That is the worry: That you get turmoil in financial markets, a big tightening in financial conditions and that adds to downward pressure on economic activity," Jan Hatzius said in a Wednesday CNN interview.
The US hit the $31.4 trillion borrowing limit last week, forcing the Treasury to step in with extraordinary measures to prevent a default. The steps include cuts to investments in retirement plans and and the Government Securities Investment Fund.
However, such measures may support public finances only until early June. The prospect of a longer-term solution remains clouded amid continued political wrangling over how much more money the government can borrow to meet its payments.
Democrats and Republicans are divided over whether to raise the debt ceiling or not, and Treasury Secretary Janet Yellen has warned lawmakers need to"act in a timely manner" to prevent the US from facing dire economic consequences.
"If there were any doubt about the US government's ability or willingness to make interest and principal payments on time, that could have very, very adverse consequences," Goldman's Hatzius said.
However, he said the bank remains optimistic that Congress will eventually reach a decision. "We think ultimately a solution will be found," Hatzius said, adding that "these solutions are often found at the very last moment." If the US escapes risks of defaulting on its debt, it's likely to avoid a recession, Hatzius said, maintaining the house view.
The bank's boss David Solomon previously said the Federal Reserve has a 35% chance to avoid recession.