Exclusive: Goldman Sachs: US debt default alone could trigger recession and market turmoil

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“If the U.S. government’s ability or willingness to pay interest and principal on time is called into question, it could have very negative consequences,” said Ian Hatzius, chief economist at Goldman Sachs. , in an interview with CNN.

Last week, the United States hit its debt ceiling, forcing Treasury Secretary Janet Yellen to make an accounting maneuver to avoid exceeding the $31 trillion borrowing limit.

If Congress fails to raise the debt ceiling on time, Hatzius said, investors “are at risk of missing payments on U.S. Treasuries, which are the most important in the global economy.”

Unlike many of its peers on Wall Street, Goldman Sachs is relatively bullish for the US economy, Hatzius told CNN that America will avoid a recession in the 2024 presidential election.

However, the debt ceiling crisis is a major threat to this optimistic outlook.

Asked whether a default or even a near-default could lead to a recession, Hatzius said yes.

“That’s the concern: you have financial market stress, a significant tightening of financial conditions, and that puts downward pressure on economic activity,” he said. “It’s certainly a concern. This is not what we expected.”

Economists and US officials have previously warned of dire consequences if the federal government uses emergency measures to prevent a default.

Yellen told CNN’s Christiane Amanpour last week that there could be a “global financial crisis” if Washington defaults. Economist Mark Zandi once described a true default as “financial Armageddon.”

“Finally there will be a solution”

History shows that Congress eventually agreed to raise the debt ceiling, although there have been strong calls before. In 2011, the United States’ S&P Global Ratings downgraded its AAA credit rating as lawmakers tried to strike a compromise. The episode helped create turbulence on Wall Street and shake business confidence.

Wall Street and Washington leaders have warned that negotiations over the debt ceiling could be particularly difficult.

The historic dysfunction in the election of House Speaker Kevin McCarthy earlier this month showed just how difficult it can be to push controversial legislation through the House. Not only does McCarthy preside over a wafer-thin majority, but he’s agreed to concessions that will significantly affect the fringes of the GOP.

However, Goldman Sachs expects a deal on the debt ceiling to be reached eventually.

“We believe that eventually a solution will be found,” Hatzius said. “These solutions are often found at the last minute.”

Why Goldman Sachs Says Recession Won’t Come

Assuming the US has passed the debt ceiling episode, Goldman Sachs is optimistic about the future of the US economy.

“We don’t expect a recession,” Hatzius said, noting that his firm still sees a substantial 35% chance of a recession, compared with the roughly 65% ​​consensus on Wall Street. “Our base is a soft landing.”

However, a wave of major companies have announced layoffs in recent weeks, including tech giants such as Microsoft and Amazon, as well as financial firms such as BlackRock and Goldman Sachs.

Goldman Sachs expects the hot job market to cool, but gradually. While Hatzius said monthly payrolls growth could fall below 100,000, he doesn’t see the economy seeing any monthly job losses this year.

Inflation has “clearly peaked”

This slowdown, along with the slowdown in real estate, the resolution of supply chain turbulence and the impact of the war in Ukraine, should help moderate inflation without triggering a slowdown.

Hatzius expects inflation to fall from 9.1% last summer to 2% to 3% by the end of this year or 2024.

“I think inflation has clearly peaked,” Hatzius said, adding that he had “relatively high confidence” in the call.

A Goldman Sachs economist said his forecast is that the US economic expansion will continue until the 2024 presidential election, but it’s not a slam dunk.

“The longer you travel in time … the more likely you are to get hit by something bad along the way and end up in a recession,” Hatzius said. “When you come in November 2024, it will be a closer call.”

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