US Debt Default to Have Severe Repercussions – IMF
Amidst uncertainties surrounding the debt ceiling, the International Monetary Fund said U.S. debt default prompted by a failure to raise the country’s debt ceiling would have “very serious repercussions”.
The multilateral lender is of the view that a default would hit the US economy fast and furious, and it is expected to have a pass-through effect on the global economy, including likely higher borrowing costs.
IMF spokesperson Julie Kozack also told a news briefing that U.S. authorities needed to stay vigilant on new vulnerabilities in the U.S. banking sector, including in regional banks, that could emerge in the adjustment to a much higher interest rate environment.
Kozack said the IMF could not immediately quantify a U.S. default’s impact on global growth. The Fund in April forecast global GDP growth at 2.8% for 2023, but said that deeper financial market turmoil, marked by a severe pullback in asset prices and sharp cuts in bank lending, could slam output growth back to 1.0%.
But she said higher interest rates could result from a U.S. default and broader instability in the global economy.
“We would want to avoid those severe repercussions,” Kozack said. “And for that reason, we again are calling on all parties to come together, reach a consensus, and resolve the matter as quickly as possible.”
Detailed talks on raising the U.S. government’s $31.4 trillion debt ceiling kicked off on Wednesday with Republicans continuing to insist on spending cuts, a day after Democratic President Joe Biden and top congressional Republican Kevin met on the issue for the first time in three months.
U.S. Treasury Secretary Janet Yellen has warned that a default on U.S. payments could come as early as June 1 if Congress fails to raise the borrowing cap.
Regarding turmoil in the U.S. banking sector, Kozack said the IMF has welcomed the “decisive” actions by U.S. regulators and policymakers to contain the failures of three major regional U.S. lenders in recent weeks.
Kozack added that the Fund would soon conduct its “Article IV” annual review of U.S. economic policies, and that assessment, to be issued towards the end of May, will analyze the impact of pressures on regional banks, including any tightening of credit conditions.
The White House and Republicans in Congress are mired in a standoff over the debt limit. Failure to raise or suspend it could result in the first-ever U.S. default.
The debt ceiling caps the amount of money Congress allows the federal government to borrow to cover its bills. The mechanism was created during World War I in an effort to simplify borrowing.
Prior to 1917, Congress needed to approve additional debt for each new spending measure it passed. Until recently, it has been a rather routine process.
Congress has lifted the debt limit 78 times since 1960. The debt ceiling was last raised in December 2021 by $2.5 trillion, capping the limit at $31.381 trillion.
If Congress does not agree to lift the debt ceiling, the government will not have money to pay its bills and will default on its debt.
The Treasury Department has already begun to take extraordinary measures to continue to fund the government, but Yellen said she expects funding to entirely deplete in early June.
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