Lagarde gets serious over US default

When the IMF boss is worrying about the world 'tipping yet again into recession', you've got to be a bit concerned...

by Emma Haslett
Last Updated: 16 Oct 2013
The clock is ticking for the two sides of the US government to reach an agreement over a) its finance bill and b) its debt ceiling. And now one of the world’s top economists has warned that unless the warring factions kiss and make up before a deadline on Thursday, the ensuing disaster could tip the world back into recession.

No pressure or anything.

In a US television interview yesterday, International Monetary Fund chief Christine Lagarde warned said that unless the US Senate can agree to raise its debt ceiling before Thursday, ‘that degree of disruption, that lack of certainty, that lack of trust in the US signature… would mean massive disruption the world over and we would be at risk of tipping yet again into recession’. (Is there a French word for 'Schadenfreude'?)

Admittedly, it isn’t exactly a unique point of view: World Bank president Jim Yong Kim has also pointed out that the US is ‘days away from a very dangerous moment’.

The problem is that because global interest rates are pegged to US bond rates, a failure to raise the US’ borrowing limit (which would cause it to default on some of its interest payments) would mean global interest rates would rise, causing confidence to drop and growth to grind to a halt.

‘If this comes to pass it could be a disastrous event for the developing world and that in turn will greatly hurt the developed economies as well,’ pointed out Kim.

Of course, the chances are that the US government will reach an agreement just in the nick of time and everything will be peachy.

But that doesn’t change the fact that thousands of government workers who are currently sitting at home twiddling their thumbs because of the shutdown aren’t being paid – which itself is going to affect economic growth. In fact, US Treasury secretary Jack Lew has guesstimated that for each week the shutdown continues, 0.25% will be shaved off economic growth. Ouch.

Even JP Morgan boss Jamie Dimon – not a man who airs his grievances often – is worried. During a panel discussion on Saturday, he said a default ‘would ripple through the global economy in a way you couldn’t possibly understand’.

Hold tight...  

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