US in talks to avoid defaulting on debt
uRGENT preparations to deal with a potential american debt default are under way at the International Monetary Fund, managing director Christine lagarde has disclosed.
‘When the biggest economy in the world is involved we have to be concerned,’ she told a press conference at the IMF’s annual meeting in Washington.
Hopes a deal to extend the uS ‘debt ceiling’ will be struck sent shares soaring on stock markets around the world.
The first break in the deadlock between the White House and Republican leaders emerged last night after President obama invited House of Representatives Speaker John Boehner to emergency talks.
Boehner previously insisted there could be no progress on ending the government shutdown or raising the uS’s borrowing ceiling without concessions on the implementation of President obama’s health reforms.
under ali kely compromise Congress would agree to extend the debt ceiling for six months in exchange for the creation of a new ‘fiscal committee’, designed to resolve some of the longerterm budget policy differences.
Such an agreement might temporarily lift the gloom but would leave the uncertainty over the future of uS budget policy in place. lagarde said if the uS failed to agree on a new debt ceiling the financial consequences could be widespread.
‘If the matter is not resolved there will be volatility and uncertainty,’ she said.
Bond prices started to spike on uS financial markets as the previously remote prospect of failing to raise the debt ceiling and a potential uS default on paying the interest on its securities becomes a real possibility.
lagarde and the IMF hoped to use the annual meetings to move the world economy to a stage where tapering of printing money and a return to normal interest rates would be the big issue.
She said she was ‘confident’ the Federal Reserve, under the new leadership of Janet yellen, would handle tapering in a gradual way ‘so there is as little spillover’ as possible. lagarde cautioned the shutdown and potential default could also cause problems via the ‘trade channel’. There was also a risk the feeble recovery in the global economy – forecast to grow at 2.9pc this year – could be damaged in the third quarter.
‘Failure to renew the debt ceiling would pose a serious danger to the uS and the global economy,’ lagarde said.
World Bank president Jim yong Kim warned that if the debt ceil i ng were not r enewed global markets could face a torrid time, as happened in the summer of 2011.