News / Economy

IMF: US Failure to Lift Debt Ceiling Could Damage World Economy

International Monetary Fund chief Christine Lagarde speaks about the upcoming IMF and World Bank meetings, at George Washington University in Washington, October 3, 2013.
International Monetary Fund chief Christine Lagarde speaks about the upcoming IMF and World Bank meetings, at George Washington University in Washington, October 3, 2013.
TEXT SIZE - +
Reuters
— Failure to raise the U.S. debt ceiling could damage not only the United States but the rest of the global economy, International Monetary Fund chief Christine Lagarde said on Thursday.
 
“It is 'mission-critical' that this be resolved as soon as possible,” she said in a speech in Washington, ahead of the IMF and World Bank annual meetings next week.
 
Republican and Democratic leaders in the U.S. Congress so far remain at loggerheads over funding the government, keeping hundreds of thousands of federal employees off the job without pay for a third day on Thursday.
 
Though a government shutdown would do relatively little damage to the world's largest economy in the short term, global markets could be roiled if Congress also fails to raise the United States' $16.7 trillion debt limit.
 
The Treasury has said the United States will exhaust its borrowing authority no later than October 17. If no deal is reached in raising the debt ceiling, analysts expect the U.S. government to run out of cash to pay its bills within weeks of that date.
 
Lagarde said growth in the United States has already been hurt by too much fiscal consolidation, and will be below two percent this year before rising by about one percentage point in 2014, assuming political standoffs are resolved.
 
The U.S. Congress imposed a so-called sequester, or across the board government spending cuts, earlier this year after failing to agree on a broad budget package.
 
Glimmers of optimism
 
Turning to the rest of the world, Lagarde pointed to signs of progress in the eurozone and Japan, but said transitions to more stable growth may take a while.
 
She said the eurozone “came up for air” in the spring after six quarters of recession, and the economy should grow almost one percent next year. The currency bloc must address debt-hobbled banks and a fragmented financial system to return to health, she said.
 
Japan also seems to be having success with its massive monetary stimulus to boost the economy out of decades of deflation and lagging growth, boosting GDP by about one percent.
 
“Deflation is coming to an end and a newfound optimism is in the air,” Lagarde said, adding that Japan must still implement a credible plan to bring down its debt and reform entitlements.
 
She said emerging markets have suffered since the U.S. Federal Reserve announced plans to eventually scale back its own monetary stimulus, which prompted capital outflows as investors bet on higher rates in advanced economies.
 
Lagarde said the turbulence could reduce GDP in major emerging markets by 0.5 to 1 percentage points.
 
Monetary policy helped rescue the global economy after the global financial crisis. But as the United States prepares to decrease the pace of its massive bond-buying, it must be aware that its policies affect people and markets around the world, Lagarde said.

‘Special resposibility’

“The U.S. has a special responsibility: to implement [normalization] in an orderly way, linking it to the pace of recovery and employment; to communicate clearly; and to conduct a dialog with others,” she said.
 
But Lagarde said the turmoil in the Middle East and North Africa may be the hardest to resolve, and take the most time. Syria is still in the midst of a civil war and Egypt struggles to address its fiscal deficit and structural reforms while dealing with a political transition.
 
“To succeed, [this region] needs the unwavering support of the international community,” Lagarde said.
 
Finally, she called on governments to better work together on reforming the financial sector, calling progress too slow, partly due to divergences among different countries. She pointed in particular to the “danger zone” of shadow banking, or the non-banking sector that can provide credit but is not under formal regulation.
 
In the United States, shadow banking is twice the size of the banking sector, and in China half the credit given this year has come from shadow banking, she said.
 
“Putting this all together in a globalized world is a headache,” Lagarde said about financial regulation. “And yet, it must be done - nothing less than global financial stability depends on it.”

You May Like

Multimedia Relatives of South Korean Ferry Victims Fire at Authorities

46 people are confirmed dead, but some 250 remain trapped inside sunken ferry More

War Legacy Haunts Vietnam, US Relations

$84 million project aims to clean up soil contaminated by Agent Orange More

Wikipedia Proves Useful for Tracking Flu

Technique gave better results than Center for Disease Control (CDC) and Google’s Flu Trends More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Ukraine, Russia, United in Faith, Divided in Politicsi
X
Michael Eckels
April 19, 2014
There is a strong historical religious connection between Russia and Ukraine. But what role is religion playing in the current conflict? In the run-up to Easter, Michael Eckels in Moscow reports for VOA.
Video

Video Ukraine, Russia, United in Faith, Divided in Politics

There is a strong historical religious connection between Russia and Ukraine. But what role is religion playing in the current conflict? In the run-up to Easter, Michael Eckels in Moscow reports for VOA.
Video

Video Face of American Farmer is Changing

The average American farmer is now 58 years old, and farmers 65 and older are the fastest growing segment of the population. It’s a troubling trend signaling big changes ahead for American agriculture as aging farmers retire. Reporter Mike Osborne says a new report from the U.S. Census Bureau is suggesting what some of those changes might look like... and why they might not be so troubling.
Video

Video Donetsk Governor: Ukraine Military Assault 'Delicate But Necessary'

Around a dozen state buildings in eastern Ukraine remain in the hands of pro-Russian protesters who are demanding a referendum on self-rule. The governor of the whole Donetsk region is among those forced out by the protesters. He spoke to VOA's Henry Ridgwell from his temporary new office in Donetsk city.
Video

Video Drones May Soon Send Data From High Seas

Drones are usually associated with unmanned flying vehicles, but autonomous watercraft are also becoming useful tools for jobs ranging from scientific exploration to law enforcement to searching for a missing airliner in the Indian Ocean. VOA’s George Putic reports on sea-faring drones.
Video

Video New Earth-Size Planet Found

Not too big, not too small. Not too hot, not too cold. A newly discovered planet looks just right for life as we know it, according to an international group of astronomers. VOA’s Steve Baragona has more.
Video

Video Copts in Diaspora Worry About Future in Egypt

Around 10 percent of Egypt’s population belong to the Coptic faith, making them the largest Christian minority in the Middle East. But they have become targets of violence since the revolution three years ago. With elections scheduled for May and the struggle between the Egyptian military and Islamists continuing, many Copts abroad are deeply worried about the future of their ancient church. VOA religion correspondent Jerome Socolovsky visited a Coptic church outside Washington DC.
Video

Video Critics Say Venezuelan Protests Test Limits of Military's Support

During the two months of deadly anti-government protests that have rocked the oil-rich nation of Venezuela, President Nicolas Maduro has accused the opposition of trying to initiate a coup. Though a small number of military officers have been arrested for allegedly plotting against the government, VOA’s Brian Padden reports the leadership of the armed forces continues to support the president, at least for now.
Video

Video More Millenials Unplug to Embrace Board Games

A big new trend in the U.S. toy industry has more consumers switching off their high-tech gadgets to play with classic toys, like board games. This is especially true among the so-called millenial generation - those born in the 1980's and 90's. Elizabeth Lee has more from an unusual café in Los Angeles, where the new trend is popular and business is booming.
Video

Video Google Buys Drone Company

In its latest purchase of high-tech companies, Google has acquired a manufacturer of solar-powered drones that can stay in the air almost indefinitely, relaying broadband Internet connection to remote areas. It is seen as yet another step in the U.S. based Web giant’s bid to bring Internet to the whole world. VOA’s George Putic reports.
AppleAndroid

World Currencies

EUR
USD
0.7217
JPY
USD
102.17
GBP
USD
0.5949
CAD
USD
1.1009
INR
USD
60.326

Rates may not be current.