The White House spokesman, Jay Carney, warned again on Tuesday that as harmful as the shutdown might be to a slowly recovering economy, a default on government debt would be far worse.
"The consequences of that are unknowable, but they are catastrophic, without question," he said on the cable channel MSNBC. "And what we see happening with this Republican strategy is a willingness to threaten the very foundation of the world's greatest economic power — the economy that basically stabilizes the entire world economic system, and that is a very risky proposition."
(Read more: Shutdown could trigger 'Fed flare': Trader)
Any further upheaval from Washington will come as the rest of the planet has already been coping with plans by the Federal Reserve to begin tapering its economic stimulus program. The Fed last month postponed the easing of its bond buying program — after mere talk of such a move had earlier driven up market interest rates and provoked an outflow of capital from developing countries.
Now this. "Once again there is an increase in uncertainty, which is the last thing we need right now," said Horst Löchel, a professor of economics at the Frankfurt School of Finance and Management.
Unless Washington reaches a settlement, the government on Oct. 17 would technically be in default. Missed interest payments on Treasury bonds, even for only a few days, would undercut one of the fundamental assumptions of financial markets, namely that Treasury securities are the safest investment there is.
Investors would then likely reassess their views of bonds issued by countries like Italy and Spain, driving up their borrowing costs to a level that would threaten government finances in those countries, which are already in deep recessions.
(Read more: Peripheral bonds: How toplay Europe's recovery)
"Investors will become afraid," Mr. Löchel said. "They will withdraw money from the United States and Europe. They will go into cash or gold or whatever but not sovereign debt," he said. "Then we are back in the euro crisis."
The consequences of an American default would be so grim, in fact, that many investors are convinced that it simply cannot happen. Despite grandstanding in Washington, the thinking goes, the parties will eventually find a compromise.
"You can't default as a big country," Mr. Prebay of Quilvest said. "You would kill everything — exports, industry. I don't think it's imaginable."
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Mr. Prebay said that at a lunch with investors on Tuesday, the talk was of tapering by the Fed and political turmoil in Italy, not the Washington shutdown. That is a sign that investors still expect Congress to step back from the brink. That faith in the ultimate reasonableness of the American people was reflected in European stocks and government bonds on Tuesday, which were little changed.
Because the markets look forward, investors had already baked the effects of a shutdown into the prices of stocks and bonds. But predicting how a default would play out is difficult, because America has never before reneged on its bonds. Furthermore, some Republicans are signaling that they are intent on avoiding a default and the Obama administration could come up with creative financing to make interest payments on Treasuries even if the government borrowing is capped.
Even without a default, a prolonged shutdown by the U.S. government could harm the world economy. But it depends on how long the shutdown lasts.
(Read more: Shutdown may last week; budget talks possible: Boehner aide)
The United States is Europe's biggest trading partner. If the American economy slows because government workers are not receiving paychecks, contractors are not getting paid, and people are postponing vacations because the gates of Yellowstone National Park are closed, then Europe will also suffer. There would be less demand for European products, including everything from Italian Ferraris to French cosmetics.
In addition, the dollar could lose value against the euro, which would make European products more expensive in the United States. Based on the previous shutdown in 1995, some economists thought the effect would be insignificant outside America.