World Bank & IMF Chiefs warn of “disastrous” economic consequences if U.S. fails to raise debt ceiling

Top officials from the World Bank and the International Monetary Fund warned that the U.S. is approaching a “very dangerous moment” that could trigger a global recession if Congress fails to raise the debt ceiling before Thursday’s deadline.

“It’s very, very concerning,” said Christine Lagarde, Managing Director of the IMF, in an interview with NBC News’s Meet the Press. “Do you remember 2008 – the beginning of the Great Recession? Well, if there was a combination of a government shutdown for a period of time and – more seriously, more damaging – if the debt ceiling was not lifted with a degree of certainty and enough time so that people could, you know, sort of have the assurance that the economy was in good standing, that would bring about so much uncertainty, so much risk of disruption, that the standing of the U.S. economy would again be at risk, that some of the obligations that the first economy in the world has would not be respected…If there is that degree of disruption, that lack of uncertainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over and we would be at risk tipping yet again into recession.”

World Bank President Jim Yong Kim said that a U.S. government default would have “disastrous” consequences on the global economy as interest rates rise and consumer confidence fall, stunting economic growth in both developing and developed countries.

“I urge U.S. policymakers to quickly come to a resolution before the reach the debt ceiling deadline. The closer we get to the deadline, the greater the impact will be for the developing world,” said Kim, who pointed out that 50% of U.S. exports go to developing countries. “It’s going to have a direct negative impact on exports in the United States.”

Private investment, which IMFC Chairman Minister Tharman Shanmugaratnam (of Singapore) noted “hinges on confidence”, will be scaled back further unless the debt ceiling issue is resolved soon. Such regression, he noted, would hamper the economic recovery in the United States.

“If we don’t get clear resolution on the U.S. fiscal and debt issue, it is going to be hard to see how that confidence is going to come back anywhere,” said Shanmugaratnam. “Restarting private investment and where it is already in place, ensuring that it grows strongly is critical in this next phase of recovery. That is quite apart from the obvious drag effects of having to cut back suddenly and significantly as a result of the lack of resolution of the medium-term.”

Recent remarks by World Bank and IMF leaders on the threat of U.S. default:

World Bank President Jim Yong Kim:

“I urge U.S. policymakers to quickly come to a resolution before the reach the debt ceiling deadline. The closer we get to the deadline, the greater the impact will be for the developing world. Inaction could result in interest rates rising, confidence falling, and growth slowing.”

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

“The U.S. Chamber of Commerce says that more than 50% of all exports are to developing countries. So this is not just that it’s going to have a negative impact on developing countries, it’s going to have a direct negative impact on exports in the United States.”

International Monetary and Financial Committee Chairman Minister Tharman Shanmugaratnam (of Singapore):

“There is a clear negative when we think about the key element of recovery that has to take place in the next one to two years, the recovery of private investment. Private investment hinges on confidence. If we don’t get clear resolution on the U.S. fiscal and debt issue, it is going to be hard to see how that confidence is going to come back anywhere. So it is a critical issue for all of U.S. Restarting private investment and where it is already in place, ensuring that it grows strongly is critical in this next phase of recovery. That is quite apart from the obvious drag effects of having to cut back suddenly and significantly as a result of the lack of resolution of the medium-term.”

Christine Lagarde, Managing Director of the IMF:

“It’s very, very concerning. You know, I’ve spent the last three days with nearly 300 finance ministers and governors of Central Banks from across the world, and the world was doing better. There was recovery in the U.S., in Europe at last. Japan was turning the corner. The emerging markets were still growing fast, and the low-income countries were really showing strong growth. And they all came together to talk about the U.S. monetary policy and its impact on emerging market economies and how they should prepare for that. And then they found out that the debt ceiling was the issue. They found out that the government had shutdown, and that there was no remedy in sight. So it really completely transformed the meeting in the last few days.”

“Do you remember 2008 – the beginning of the Great Recession? Well, if there was a combination of a government shutdown for a period of time and – more seriously, more damaging – if the debt ceiling was not lifted with a degree of certainty and enough time so that people could, you know, sort of have the assurance that the economy was in good standing, that would bring about so much uncertainty, so much risk of disruption, that the standing of the U.S. economy would again be at risk, that some of the obligations that the first economy in the world has would not be respected. And I think, you know, there was a lot of discussion amongst the finance ministers from all over the world about the technical aspects of it and you can argue forever as to whether the impact is going to be 2.5%, 3%, 5%, how much public spending will have to be cut, how many people will be unemployed but one thing was certain around the table: If there is that degree of disruption, that lack of uncertainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over and we would be at risk tipping yet again into recession.”

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