The new head of the International Monetary Fund, Christine Lagarde, warns of very serious consequences for the global economy if the United States defaults on its debt. She issued the warning Tuesday at the Council on Foreign Relations in New York City in her first major policy address as IMF managing director.
Christine Lagarde said the critical objective for the United States must be to increase its debt ceiling to avoid default. She said it is not up to her to comment on the political bargaining and bickering in Washington over the debt ceiling. She noted, however, that the stakes are high.
"A default, or to have a significant downgrading of the United States signature, would be a very, very, very serious event, not for the United States alone, but for the global economy at large," said Lagarde.
Lagarde said sovereign debt, including that of the United States, Greece, Portugal and Ireland, is one of the three major challenges to the global economy. The second is growth, which she said, can address the debt problem and avoid the third - instability.
"Social instability can be addressed by what? By essentially the expectations that will be met by reality, and by that I mean employment," Lagarde said. "When you look at the rates of unemployment, not only in this country, but in many, many advanced economies, as well as in emerging markets, it is an issue for everybody."
The IMF chief said the young everywhere have high expectations for employment, particularly in Tunisia, Egypt and most of the countries along the southern rim of the Mediterranean.
Lagarde praised the leaders of Portugal and Ireland for the political courage to adopt unpopular austerity measures to address their countries’ debt crises.
"What we’ve seen in both Portugal and Ireland was a bipartisan approach, and that was often preceded by the willingness of the party in power to eventually not be re-elected," Lagarde said. "If you look at Ireland, the party that actually negotiated the agreement, lost the election. If you look at Portugal, the same was true."
Lagarde said eurozone leaders last week adopted a fiscal package that includes new financing for debt-ridden Greece. However, she criticized Greek leaders for the absence of political courage, and expressed hope that American leaders would find such courage to reach an agreement on the U.S. debt ceiling.