IMF chief Lagarde warns against a US debt default

WASHINGTON - Agence France-Presse

IMF Managing Director Christine Lagarde makes remarks at a news conference during the IMF and World Bank's 2013 Annual Fall Meetings, a gathering of the world's finance ministers and bank governors, in Washington, Oct. 10. REUTERS photo

International Monetary Fund chief Christine Lagarde on Oct. 10 warned that a U.S. debt default could damage the global economy, as Washington remained gridlocked in a budget battle.

One week before the United States faces a deadline to raise its borrowing limit, Lagarde underlined deep concerns about a looming first-ever default by the world's largest economy.

"It is not helping the U.S. economy to have this uncertainty and this protracted way of dealing with fiscal issues and debt issues," the IMF managing director said. "There will be very, very negative consequences for the U.S. economy, and there will be very negative consequences outside of the U.S. economy." 

Speaking at a news conference as the IMF and World Bank annual meetings got underway in Washington, Lagarde stressed that the IMF does not involve itself in political matters.

"The IMF does not take a stand, and does not make a recommendation, as to how politically this matter can be resolved," Lagarde said.

But she stressed "that the fiscal house of the U.S. be put in order." The IMF has been studying the potential impact of a US default on the global economy, including how it could affect financial and trade flows and cause setbacks to economically weak countries.

But she stressed that the IMF does not expect that worst case to take place.

"I hope that in a few weeks time, we will look back and say, 'what a waste of time that was.'" Lagarde's remarks came as U.S. President Barack Obama was to meet separately with his fellow Democrats as well as Republicans in a bid to forge a path out of the budget crisis.

The U.S. federal government has been partially shut down for 10 days since Congress failed to pass a budget for the 2014 fiscal year that began October 1.

Severe impacts await developing countries: World Bank president

Meanwhile the government was careening toward an October 17 deadline to raise the $16.7 trillion debt ceiling or, the U.S. Treasury says, it will run out of cash to pay all its bills.

World Bank President Jim Yong Kim also voiced concern about the U.S. being forced to default on its debts if the country's borrowing ceiling remains frozen. "The impacts are going to be severe" on the developing countries, said Kim, who has launched a goal to end extreme poverty by 2030 and boost share prosperity in the bottom 40 percent of the population in developing countries.

He pointed out that an impact could still be felt even if the United States manages to avoid a default.

In the last showdown over the U.S. debt ceiling, in July-August 2011, Kim said, Democrats and Republicans reached an 11th-hour agreement to raise the limit, but not before the fallout reached the emerging-market economies.

The borrowing costs of these countries jumped and stayed higher for months, he added.

The Organization for Economic Cooperation and Development warned Wednesday that a default could throw most of the world's major economies "back into recession next year" and badly damage emerging nations.