The Free Press, Mankato, MN

State, national news

October 7, 2013

A U.S. default seen as catastrophe dwarfing Lehman's demise

Experts see other markets being hobbled, economy hammered

NEW YORK — Anyone who remembers the collapse of Lehman Brothers Holdings little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.

Failure by the world's largest borrower to pay its debt — unprecedented in modern history — will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.

The $12 trillion of outstanding government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008. As politicians butt heads over raising the debt ceiling, executives from Berkshire Hathaway's Warren Buffett to Goldman Sachs's Lloyd C. Blankfein have warned that going over the edge would be catastrophic.

"If it were to occur — and it's a big if — one would expect a series of legal triggers, potentially transmitting the default to many other markets," said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the world's largest fixed-income manager. "All this would add to the headwinds facing economic growth. It would also undermine the role of the U.S. in the world economy."

The U.S. stock market lost almost half its value in the five months following Lehman's failure. The country had its worst recession since the Great Depression, taking the global economy down with it. Unemployment surged to 10 percent, the highest in three decades.

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