IMF turns up pressure on US over budget deadlock

THE US was last night under intense pressure from the international financial community to resolve its budget deadlock and avert a global calamity.

The International Monetary Fund said that a failure to lift the US limits on borrowing, which currently stand at $16.7 trillion, would be ‘ a major event’ and could trigger a ‘recession or even worse’.

IMF chief economist Olivier Blanchard told a press conference in Washington: ‘Prolonged failure would lead to an extreme fiscal failure and surely derail the US recovery. The effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets both in the United States and abroad.’

It came as the IMF trimmed its US growth forecasts for this year and next at the same time as predicting a far stronger outlook in the UK.

Japan and China, holders of vast quantities of US bonds and Treasury bills, warned against an unprecedented American debt default that would undermine the value of their international reserves.

Despite the alarmist words, Republicans on Capitol Hill looked to be unmoved.

Leading Republican Senator Tom Coburn, of Oklahoma, said: ‘ I would dispel the rumour that if we don’t raise the debt ceiling we will default on our debt. We won’t. We’ll continue to pay interest.’

The White House says it must have a ‘ clean’ debt l i mit increase and that must happen by October 17, which is the day that Treasury Secretary Jacob Lew says the US will run out of the right to borrow money, taking the American economy into uncharted territory. The reality is that the White House will still have $30bn in its back pocket on October 17 plus whatever arrives in tax receipts between now and then. That would give the US several weeks of leeway before actually defaulting.

Blanchard warned of ‘psychological problems’ for investors and added: ‘It could well be that recovery would turn i nto a recession or even worse.’

He dismissed the idea that breaching the debt ceiling would have any direct impact on China’s ability to grow.