"There Will Be Blood": S&P Warns Failure To Raise Debt Ceiling Would Be "More Catastrophic Than Lehman"

With just one month left until the Treasury "X-date", or the moment when it would run out of cash without a debt-ceiling resolution...

... the time has come for dire, apocalyptic threats to spook Congress into action and specifically reaching a compromise on a debt ceiling resolution, and S&P - which infamously downgraded the US in 2011 during the last debt ceiling fiasco - is happy to be the source of bad news.

In a report published on Wednesday titled "With A Shutdown, There Will Be Blood", U.S. chief economist at S&P, Beth Ann Bovino, writes that “failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase many of the gains of the subsequent recovery.

Not even bothering to focus too much on the implications of a debt-ceiling breach, which would result in a technical default of the US, and potentially imperil the reserve status of the US Dollar, Bovino instead analyses the other key event due in a month, the potential government shutdown and writes that If it began early in the quarter, a shutdown would shave at least $6.5 billion off of real 4Q GDP each week it continues. Her analysis is based in part on 1995-1996 government shutdown and 16-day shutdown in October 2013.

 

However, agreeing with Goldman's analysis released earlier, the S&P analyst said that the likelihood of a federal shutdown in late September remains “slim” with the fallout from Harvey reducing the chances further.

Still, S&P is unwilling to assume a happy ending, with Bovino adding that "betting on a rational US government can be risky." Judging by today's latest blow out in the spread between September/October Bill yields, the market agrees.