Expect financial market and economic chaos to ensue if U.S. lawmakers don't find a resolution on the debt ceiling this time around.

"If there was even a temporary default on the U.S. debt, it would really be a financial catastrophe," NYU professor and economist Nouriel Roubini told Yahoo Finance Live at the World Economic Forum (video above). "So if you default on the debt, domestic and foreign investors in the private sector are not going to buy your bonds, and you'll have a spike in interest rates."

Lawmakers took one step toward that scenario on Thursday.

The federal government officially reached its $31.38 billion debt limit. In turn, that triggered the Treasury Department to utilize its "extraordinary measures" to sidestep a debilitating debt default.

"Failure to meet the government's obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability," U.S. Treasury Secretary Janet Yellen wrote in a memo to the House of Representatives on Jan. 13.

Yellen said Treasury's extraordinary measures will likely be exhausted by early June, putting pressure on lawmakers to find a debt ceiling resolution that has proven challenging in the past.

The U.S. famously lost its AAA credit rating for the time ever by S&P in early August 2011 amid a contentious debt ceiling debate that almost triggered a government shutdown.

The S&P 500 (^GSPC) lost about 12% from early July 2011 through the end of August as investors voiced their concern on the country's debt situation.

Roubini says officials need to avoid a similar situation at all costs, especially as the U.S. economy contends with sluggish economic growth and stubbornly high inflation.

"It would be crazy and a total catastrophe for the U.S.," Roubini added on any potential debt default.

More Yahoo Finance coverage of Davos 2023:

  • Rubenstein: Fed will settle for 'tolerable' 3% inflation, doesn't see imminent recession

  • Nouriel Roubini says 'literally 99% of crypto is a scam'

  • Roubini: U.S. debt ceiling fight is a potential 'financial catastrophe'

  • 'You can see': Citi CEO details how the bank handles productivity amid hybrid work

  • Why Unilever's CEO has embraced Disney investor Nelson Peltz

  • Immigration tops U.S. officials' agendas at this week's global gathering

  • Gary Cohn on recession fears: 'We've weathered the storm in the United States'

  • Bank of America CEO: No mass layoff announcements are in the cards

  • Bank of America CEO on Fed easing: Why 'higher for longer' makes sense

  • Davos: PwC survey finds 'bleak CEO outlook' for 2023

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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