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New IMF chief urges U.S. to increase its debt limit
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Toronto Star- WASHINGTON—The impact of a failure to raise the U.S. borrowing limit could extend beyond America’s borders and damage the global economy, the chief of the International Monetary Fund said Tuesday.
In a speech at the Council on Foreign Relations in New York, Christine Lagarde urged U.S. political leaders to show the same “political courage” that European leaders demonstrated last week, when they agreed on several new measures to address that continent’s debt crisis.
U.S. President Barack Obama and Republican lawmakers are at an impasse in negotiations to raise the United States’ $14.3 trillion (U.S.) borrowing limit. The federal government is at risk of defaulting on its debt after Aug. 2 if an agreement isn’t reached by then.
Credit rating agencies such as Standard & Poor’s and Moody’s have warned that they will downgrade the United States’ top credit rating if an agreement isn’t reached. Standard & Poor’s has also said it may reduce the nation’s credit rating if there aren’t steep cuts to the U.S. budget deficit.
Lagarde said a default or downgrade of U.S. debt “would be a very, very, very serious event not just for the United States but for the global economy at large.”
U.S. Treasury bonds play a “central role” in world financial markets, the IMF said in a staff report Monday. U.S. Treasury securities have traditionally been seen as the safest investment in the world. More than $4 trillion of Treasuries are held by governments in China, Japan and other countries, as well as by private investors. That means higher interest rates on Treasuries could have a global impact.
Lagarde said sharp cuts in government spending and other measures to reduce the budget deficit may slow the economy in the short run, but not by much.
IMF research has found that a 1 percentage point cut in the deficit could reduce economic growth by one-half a percentage point over two years. For that reason, policy-makers should agree on measures that lower deficits but implement them in future years, she said, when the economy is stronger.
But IMF analysis also shows that the impact of deficit cuts could even be positive, she said, as it could bolster business and consumer confidence.
The U.S. budget deficit is projected to reach $1.4 trillion this year, up from $1.29 trillion in 2010.
“No country can have sustainable growth on such an imbalanced basis,” she said.
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