IMF to U.S.: Raise the Debt Ceiling Quickly

IMF to U.S.: Raise the Debt Ceiling Quickly

Published July 25, 2011


Reuters

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 Aug. 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 Oct. 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.

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IMF chief warns of global dangers of US default (AFP)

26 July 2011, 11:09 PM

WASHINGTON — IMF chief Christine Lagarde warned Tuesday the clock was ticking on a US debt deal, as the dollar slid to new lows amid concerns of a looming and unprecedented default by the world’s top economy.

With a week to go before the United States hits an August 2 deadline when the government runs out of funds to pay its bills, Congress remained deeply divided on raising the $14.3 trillion debt ceiling.

In a solemn late night address to the nation on Monday, Democratic President Barack Obama hit out at what he called a “dangerous game” being played by rival Republicans.

“We can’t allow the American people to become collateral damage to Washington’s political warfare,” Obama said, warning of a “deep economic crisis” if the United States, still emerging from recession, defaults.

But Republican House Speaker John Boehner Tuesday insisted: “We have a bill that is a reasonable approach — we’ve negotiated with the Senate leadership — that really is common sense.”

Republicans have said they will only agree to raising the debt limit if there are accompanying measures to rein in the ballooning US deficit.

Obama has agreed to a raft of deep spending cuts, but Republicans emboldened by newly elected arch-conservative Tea Party lawmakers have refused his demand for matching revenue increases to be imposed on the rich and big corporations.

Lagarde, the new head of the International Monetary Fund, waded into the debate Tuesday urging the two sides to find a compromise.

“The clock is irremediably ticking, and people really have to find a solution,” she said in New York.

She warned a default “would be a very, very, very serious event. Not for the United States alone, but for the global economy at large.”

According to the IMF, US public debt will reach 99 percent of its GDP in 2011 and 103 percent in 2012.

World markets wobbled again as global fears spread of no end to the stalemate before next Tuesday’s deadline.

US stocks fell, with the Dow Jones Industrial Average down 64 points (0.52 percent) at midday.

European equities also dropped while the dollar slid against the euro and yen, hitting an all-time low against the safe-haven Swiss franc.

“The foreign exchange market seems to be losing faith that the US Congress will reach an agreement... This has caused a sell-off in the dollar across the board,” said Kathleen Brooks, an analyst at trading group Forex.com.

Boehner has proposed a two-step plan with debt increases first to February or March 2012, and later to 2013.

And Republican House Majority Leader Eric Cantor called on the party “to stop grumbling and whining and to come together as conservatives and rally behind the speaker and call the president’s bluff,” a Republican source said.

But Obama has rejected the idea of a temporary debt limit increase, arguing it would leave the underlying problem unresolved and risk repeating the current crisis in six months’ time.

Obama has warned of “Armageddon” if the United States defaults on its debt repayments for the first time in history, which could see the US lose its coveted AAA debt rating status and plunge the global economy back into turmoil.

Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally.

The United States, still recovering from the 2008 recession with unemployment hovering around 9.2 percent, would be faced with tough choices — meeting either its debt obligations, or reneging on government checks to the poorest, most vulnerable Americans.

The political stakes are also high ahead of the November 2012 elections, and Obama appealed to Americans to “make your voice heard” to members of Congress.

Reports suggested many had heeded the call and that some congressional websites had crashed and the Congress switchboard was flooded with calls.

There are signs the standoff is exacting a political toll on both the president and Republicans ahead of next year’s White House race.

Washington Post/ABC television poll showed weakening support for Obama’s economic agenda, and found the percentage of people who said he has made the economy worse has jumped six points since October to 37 percent.

But about as many people blamed Republican policies with 65 percent disapproving of the GOP’s handling of jobs compared to 52 percent for the president.

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