Christine Lagarde, managing director of the International Monetary Fund, or IMF, warned on Thursday that the global economy could face serious damage if the United States failed to act swiftly to resolve the political deadlock in Washington, and to launch measures to raise the government’s borrowing limit to avoid defaulting on its debt.
The U.S. is expected to hit its $16.7 trillion debt ceiling on Oct. 17, after which the Treasury Department will no longer be able to borrow money to spend. Although, the Treasury could pay some bills using daily tax revenues, it is hard to predict exactly how much money will be incoming each day and how much money will be needed to meet its expenses -- a scenario that makes a default in payments highly likely.
“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,” Lagarde said, according to a transcript of her speech at George Washington University. “So it is mission-critical that this be resolved as soon as possible.”
“The U.S. needs to do more to make debt sustainable down the road—by containing the growth of entitlement spending and raising revenues,” Lagarde said.
Mapping a scenario predicting the Treasury’s cash inflows and outflows if U.S. lawmakers fail to raise the debt limit, Reuters reported that the Treasury would be left with $30 billion by Oct. 17, and by Oct.30, the government will be $7 billion short of meeting its daily expenses, leading to a default for the the first time in the nation's history.
The most recent debt-ceiling impasse was in 2011, and although lawmakers reached an agreement before the government defaulted on payments, the crisis led to a downgrade of U.S. credit rating, and hurt stock markets the most since the 2008 financial crisis.
“A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” the Treasury Department said in a report on Thursday. “Political brinksmanship that engenders even the prospect of a default can be disruptive to financial markets and American businesses and families.”
Gayathri writes about geopolitics and business for International Business Times. She began her career at the Times of India as news coordinator, before moving on to IBTimes...