WASHINGTON (MNI) – The following text is U.S. Treasury Secretary
Timothy Geithner’s response to Senator Bennet regarding the fiscal and
economic consequences of Congress failing to increase the debt limit.
This letter was sent to Senator Bennet Friday night:

The Honorable Michael Bennet
United States Senate
Washington, DC 20510
Dear Senator Bennet:
WASHINGTON, D.C.
May 13,2011

Thank you for your recent letter requesting an estimate by the
Treasury Department of the fiscal and economic consequences of failing
to raise the statutory debt limit. I greatly appreciate your leadership
on this issue and your strong commitment to protecting the full faith
and credit of the United States.

I hope that Congress will act in a timely manner to increase the
debt limit and protect the full faith and credit of the U.S. government,
but I appreciate the opportunity to respond to you about this matter. As
you know, the debt limit does not authorize new spending commitments. It
simply allows the government to finance existing legal obligations that
Congresses and presidents of both parties have made in the past. Failure
to raise the debt limit would force the United States to default on
these obligations, such as payments to our servicemembers, citizens,
investors, and businesses. This would be an unprecedented event in
American history. A default would inflict catastrophic, far-reaching
damage on our Nation’s economy, significantly reducing growth, and
increasing unemployment.

A default would call into question, for the first time, the full
faith and credit of the U.S. government. As a result, investors in the
United States and around the world would be less likely to lend us money
in the future. And those investors who still choose to purchase Treasury
securities would demand much higher interest rates, reflecting the
increased risk that we might default on our obligations again.

Default would not only increase borrowing costs for the Federal
government, but also for families, businesses, and local governments –
reducing investment and job creation throughout the economy. Treasury
securities set the benchmark interest rate for a wide range of credit
products, including mortgages, car loans, student loans, credit cards,
business loans, and municipal bonds. Accordingly, an increase in
Treasury rates would make it more costly for a family to buy a home,
purchase a car, or send a child to college. It would make it more
expensive for an entrepreneur to borrow money to start a new business or
invest in new products and equipment.

A default would also lead to a sharp decline in household wealth,
further harming economic growth. Higher mortgage rates would depress an
already fragile housing market, causing home values to fall.
Additionally, a default would substantially reduce the value of the
investmentsincluding Treasury securities – held in 401(k) accounts and
pension funds, which families depend on for their retirement security.
This significant reduction in household wealth would threaten the
economic security of all Americans and, together with increased interest
rates, would contribute to a contraction in household spending and
investment.

Default would also have the perverse effect of increasing our
government’s debt burden, worsening the fiscal challenges that we must
address and damaging our capacity for future growth. It would increase
rates on Treasury securities, which would significantly increase the
cost of paying interest on the national debt. Additionally, the severe
economic damage caused by a default would result in weaker growth for an
extended period oftime – lowering tax revenues and putting increased
demands on social safety net programs. As a result, a default would
channel a larger share of our national wealth toward paying our
creditors rather than reducing our debt or making productive investments
in education, innovation, infrastructure, and other areas that will help
drive economic expansion and create new jobs.

The unique role of Treasury securities in the global financial
system means that the consequences of default would be particularly
severe. Treasury securities are a key holding on the balance sheets of
virtually every major insurance company, bank, money market fund, and
pension fund in the world. They are also widely used as collateral by
financial institutions to meet their dayto- day cash flow needs in the
short-term financing market.

A default on Treasury debt could lead to concerns about the
solvency of the investment funds and financial institutions that hold
Treasury securities in their portfolios, which could cause a run on
money market mutual funds and the broader financial system – similar to
what occurred in the wake of the collapse of Lehman Brothers. As the
recent financial crisis demonstrated, a severe and sudden blow to
confidence in the financial markets can spark a panic that threatens the
health of our entire global economy and the jobs of millions of
Americans.

Even a short-term default could cause irrevocable damage to the
American economy. Treasury securities enjoy their unique role in the
global financial system precisely because they are viewed as a risk-free
asset. Investors have absolute confidence that the United States will
meet its debt obligations on time, every time, and in full. That
confidence increases demand for Treasury securities, lowering borrowing
costs for the Federal government, consumers, and businesses. Indeed,
during the recent crisis, investors flocked to Treasury securities as a
safe-haven asset in the midst of a damaging financial panic. A default
would call into question the status of Treasury securities as a
cornerstone ofthe financial system, potentially squandering this unique
role and the economic benefits that come with it.

Moreover, the fact that the United States would not have enough
money to meet all of its obligations would have serious economic
consequences. If the United States were forced to stop, limit, or delay
payment on obligations to which the Nation has already committed – such
as military salaries, Social Security and Medicare, tax refunds,
contractual payments to businesses for goods and services, and payments
to our investors – there would be a massive and abrupt reduction in
federal outlays and aggregate demand. This abrupt contraction would
likely push us into a double dip recession.

It is critically important that Congress act as soon as possible to
raise the debt limit so that the full faith and credit of the United
States is not called into question. Congress has never failed to raise
the debt limit when necessary. I fully expect that Congress will once
again take responsible action, and look forward to working with you and
your colleagues on this issue in the weeks ahead.

** Market News International Washington Bureau: 202-371-2121 **

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