Debt default would be ‘catastrophic' event that could kill millions of American jobs, Moody's warns

The US risks an economic catastrophe if it doesn't raise its debt ceiling, according to Moody's Analytics.

Debt default would be ‘catastrophic' event that could kill millions of American jobs, Moody's warns

CNN New York --

Moody's Analytics warns that a breach of the US debt limit could lead to an economic disaster of 2008-style, threatening millions of jobs and setting America back for future generations.

In a new report ahead of Congressional testimony, Moody's chief economist Mark Zandi described the standoff over raising the debt limit as an 'immediate threat' to the nation's economy that could negatively impact virtually all Americans.

'A default would be a catastrophic blow to the already fragile economy,' Zandi said in prepared remarks to be delivered during a Senate subcommittee hearing on Tuesday. 'The timing couldn't be worse for the economy, as even before the specter of a debt limit breach many CEOs and economists believe a recession is likely this year.'

In new economic simulations, Moody's estimates that even a brief breach of the debt limit would kill nearly a million jobs and cause the economy to sink into a 'mild' recession. The unemployment rate would jump from the half-century low of 3.4% at the start of this year to almost 5%. Markets would get rocked, wiping out a chunk of the retirement savings and nest eggs of many Americans.

'A TARP moment seems likely,' Zandi wrote in the report, referring to the late-2008 event when Congress initially failed to pass a bailout program but then quickly reversed course after markets took a nosedive. 'A similar crisis, characterized by spiking interest rates and plunging equity prices, would be ignited.'

That turmoil would include a seizing up of the short-term funding markets that keep the economy going.

The warning comes after Fitch Ratings told CNN on Monday that the US credit rating could get downgraded even if a default is avoided because repeated debt ceiling standoffs will raise debt about the US dollar and Treasuries.

Citing concerns about America's mountain of debt, Republicans have called for steep cuts to federal spending in exchange for raising the debt ceiling.

Moody's warns that 'dramatic' cuts to government spending in this scenario would spark a 2024 recession that costs the economy 2.6 million jobs and lifts the unemployment rate near 6%.

'It is fair to say that lower-income households suffer substantially more financially, as they rely heavily on the government benefits lost in the budget cuts,' Zandi wrote.

These are not the worst-case scenario.

A prolonged breach of the debt ceiling would spark a 'cataclysmic' blow to the economy similar to that experienced during the global financial crisis, according to Moody's.

The report projects the economy would lose more than 7 million jobs, the unemployment rate would more than double to above 8% and $10 trillion in household wealth would vanish as stocks plunge by more than 20%.

Given the enormous stakes, Moody's Analytics urged lawmakers to avoid playing chicken with US debt.

'Lawmakers should put an end to the wrangling over the debt limit and increase it with no strings attached so future generations can enjoy the same benefits,' Zandi said in his prepared remarks.