Failure to raise US debt ceiling may be 'catastrophic' - Lagarde


Posted at Jan 18 2013 09:58 AM | Updated as of Jan 18 2013 05:59 PM

WASHINGTON - Nations around the globe need to press forward with fiscal and reform promises, especially in the United States and Europe, to reduce the uncertainties shackling growth, the head of the IMF said on Thursday, warning that the global economy barely dodged a bullet last year.

IMF Managing Director Christine Lagarde said the euro zone debt crisis and U.S. "fiscal cliff" could have brought growth screeching to a halt, an outcome only avoided by decisions often taken at the last minute.

In particular, she urged the United States to raise its borrowing limit and pressed Europe to follow through with commitments to tackle its debt crisis, which in some countries means more fiscal consolidation.

"Clearly, the collapse has been avoided in many corners of the world," Lagarde told reporters even as she expressed concern policymaker resolve could weaken just because there is a "bit" of recovery in sight and financial stresses have eased.

"It's important to follow through on policies to put uncertainty to rest," she said. "There is still a lot of work to be done."

In her first news conference of 2013, Lagarde focused on political battles over the budget in the United States and the risks the euro zone's debt crisis still presents. That focus is not new but Lagarde made clear she worried that complacency could set in.

In an interview with Reuters Insider television, Lagarde warned that a fight in the United States over raising the nation's $16.4 trillion borrowing limit could be "catastrophic" for the global economy if it is not raised in time.

"I very, very strongly hope that all parties, all views will converge in the national interest of the U.S. economy and in the international interest of the global economy," she said. "To imagine that the U.S. economy would be in default, would not honor the payments that it owes, is just unthinkable."

The United States bumped into the debt ceiling on New Year's eve and has been employing special measures to meet its financial obligations. The Treasury Department said those steps could be exhausted by mid-February, raising the specter of a default.

Republicans want to use the need to raise the debt ceiling as leverage to exact deep spending cuts. The White House has said it will not negotiate.

A standoff over the budget at the end of last year nearly pushed the United States, the world's largest economy, over the $600 billion fiscal cliff of tax hikes and spending cuts that economists said would tank the economy.

But last minute action by the Congress softened the blow, one of the policy steps Lagarde alluded to in her news conference.


In Europe, she said, progress had been made last year to tackle the debt crisis. Unfinished business included the need to press forward with plans for a banking union.

She also said that while a financial firewall against the debt crisis had been erected, it had not yet made "operational," a reference to a European Central Bank program to buy bonds from debt-laden euro zone countries that seek a rescue.

Further, she said the ECB needed to keep monetary policy easy and perhaps try to lower borrowing costs further to help struggling member states.

"Continued, if not further monetary easing, will be appropriate in order to sustain demand," Lagarde said.

The euro zone is still struggling with the debt crisis, with the currency bloc lurching into recession last year for the second time since 2009.

Last year, rising borrowing costs had put Spain and Italy in the crosshairs, but the ECB's promise of support has helped calm worries in financial markets.

She said confidence had even returned in Greece, the epicenter of the crisis. Still, she warned it could be a year before international lenders can judge whether Athens is delivering on austerity and reform commitments made under a joint European Union/IMF bailout.

Emerging economies were faring better, Lagarde said, but she warned policymakers in those countries should be on the lookout for damaging spillovers from advanced economies.

She urged developing countries to replenish their fiscal safety nets, which were depleted as countries fought off the effects of the global financial crisis and euro zone turmoil.

Lagarde urged countries to complete unfinished financial regulation reforms, first prompted by the global financial crisis, and to resist push back by powerful industry groups working against the completion of changes.

"We recognize there has been progress but the process has been very time consuming and continues to contribute to uncertainty," Lagarde said. "We sense a sign of waning commitment. There is still momentum but it is probably not as crucial as it was and we regret it."