Washington (AFP) – International Monetary Fund chief Christine Lagarde warned Thursday that a U.S. failure to raise the debt ceiling, which could lead to default, could wreak havoc on the global economy.
“The ongoing political uncertainty over the budget and the debt ceiling does not help,” Lagarde said in a speech in Washington, on the third day of a U.S. government shutdown due to a budget impasse in a bitterly divided Congress.
“The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the U.S. economy, but the entire global economy,” she said, according to her prepared remarks.
“So it is ‘mission-critical’ that this be resolved as soon as possible,” she added.
Prospects for a swift resolution of the budget impasse remained dim as Democrats and Republicans showed no hint of compromise.
Congress missed a deadline to approve a budget for 2014 fiscal year, which began Tuesday, forcing the partial shutdown of the federal government and putting hundreds of thousands of civil servants on unpaid leave.
The budget fight appears to be bleeding into a battle over raising the $16.7 trillion debt limit. The Treasury estimates that it would likely exhaust its cash reserves around October 17.
“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth,” the Treasury said in a report Thursday.
Lagarde, in the speech at George Washington University ahead of the IMF/World Bank annual meetings next week, reiterated the Fund’s concerns about U.S. fiscal policy’s dampening effects on the world’s largest economy.
She highlighted the “sequester” drastic spending cuts stemming from the fight between Democrats and Republicans over the budget and entitlement programs.
“I have said many times before that the U.S. needs to ‘slow down and hurry up’ — by that I mean less fiscal adjustment today and more tomorrow. That means replacing the sequester with more back-loaded measures that do not hurt the recovery,” Lagarde said.
She added: “At the same time, the U.S. needs to do more to make debt sustainable down the road — by containing the growth of entitlement spending and raising revenues.”