The International Monetary Fund warned on Monday the United States must raise the debt ceiling quickly and get its debts under control for the sake of the global economy.
The IMF made the appeal as part of a review of U.S. economic prospects in which it concluded a slow-paced recovery can continue with some fiscal tightening but stressed that public debts were a concern.
Directors (on the IMF board) highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation program, the IMF said as efforts continued between the Obama administration and lawmakers to craft some plan to avoid a potential U.S. debt default.
With an August 2 deadline approaching, after which the United States may not be able to issue more debt, lawmakers have so far refused to compromise on a plan to raise the $14.3-trillion legal borrowing limit and come to grips with spending and tax issues.
The IMF said some action to get debts under control must start in fiscal 2012, which begins on October 1, or the United States will face a disruptive loss of credibility.
The strategy should include entitlement reforms, including additional savings in health care, as well as revenue increases, including by reducing tax expenditures, it said.
IMF staff said risks to the U.S. outlook were rising. Those include the possibility of a sudden increase in interest rates or a sovereign downgrade in U.S. debt -- basically a decision to rank the United States as less creditworthy -- if agreement to raise the debt ceiling and install a medium-term plan for debt reduction is not soon reached.
These risks would also have significant global repercussions, given the central role of U.S. Treasury bonds in world financial markets, the IMF said.
While calling for a debt-reducing agreement, the global lender also cautioned that an excessively large upfront fiscal adjustment should be avoided because that would further dampen domestic demand and slow growth.
At best, it estimated only a soft expansion for the U.S. economy from 2012 onward, likely between 2-3/4 percent and 3 percent that would bring only moderate income gains and slow reduction in heightened unemployment rates.
(Reporting by Glenn Somerville and Mark Felsenthal; Editing by Andrea Ricci and Andrew Hay)