IMF’s Christine Lagarde warns on US debt ceiling

A failure to raise the US debt ceiling would threaten the entire global economy, the managing director of the International Monetary Fund has warned.
“The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse,” said Christine Lagarde in a speech at George Washington University on Thursday. “So it is ‘mission-critical’ that this be resolved as soon as possible.”
Ms Lagarde’s warning shows how the limit on US borrowing – which the Treasury estimates it will hit on October 17 – is rapidly becoming the most pressing macroeconomic issue for the whole world. If the limit is not raised on time, the US could default on its debts, which could cause a panic in financial markets.
In her traditional curtainraising speech ahead of the annual World Bank and IMF meetings in Washington next week, Ms Lagarde said the world economy is going through “transitions on an epic scale”.
“Overall, the global outlook remains subdued,” she said. “In many of the advanced economies, however, we are finally seeing signs of hope. Growth is looking up, financial stability is returning, and fiscal accounts are looking healthier.”
The impact of a slowdown on US Federal Reserve asset purchases had been expected to dominate this year’s annual meetings but the Fed’s decision to hold off on tapering has taken away that focus.
Instead, the world’s economic policy makers will have a ringside seat as they assemble in a US capital where much of the federal government is shutdown and a potential default is just days away if Congress cannot resolve its differences.
“Because the normalisation of monetary policy affects so many markets and people across the globe, the US has a special responsibility: to implement it in an orderly way, linking it to the pace of recovery and employment; to communicate clearly; and to conduct a dialogue with others,” said Ms Lagarde.
The expectation of “tapering” by the Fed had prompted a flight of capital from emerging markets, causing currencies and asset markets to fall, only for a sharp flow back the other way when the US central bank unexpectedly kept its purchases at $85bn a month in September.
Ms Lagarde warned that the recent bout of turbulence in emerging markets could lower their output by 0.5 to 1 percentage point even as growth was slowing anyway.
“The immediate priority is to ride out the turbulence as smoothly as possible,” she said. “Currencies should be allowed to depreciate. Liquidity provision can help deal with dysfunctional market behaviour. Looser monetary policy can also help.”
But she warned that countries with inflationary pressures – such as Brazil, India, Indonesia and Russia – have less scope to use monetary policy and that high debt and deficits mean many developing countries have little space for fiscal stimulus either.
She said the US showed the clearest signs of recovery. “We see it all around us. Households are in better shape, the housing sector is looking brighter and the private sector engine is humming again. And yet, growth this year will still be too low – below 2 per cent – due to too much fiscal adjustment.”
She also pointed to improved growth in the eurozone. “Now, after six quarters of recession, the region came up for air last spring, and growth should be back in positive territory next year – almost 1 per cent,” she said. “Yet unemployment – at 12 per cent – is still far too high.”
Ms Lagarde called on China to slow down its credit boom and try to grow via higher productivity. “This means liberalising interest rates, ramping up financial sector oversight, opening up protected sectors to private initiative and further strengthening of the social safety net,” she said.

Fonte: FT