IMF Managing Director Christine Lagarde on Thursday warned that a failure by the United States to increase its borrowing limit could do deep damage to both the American and global economies.
Lagarde told reporters at a news conference that the U.S. needs to put its fiscal house in order, referring to the current budget deadlock in Congress that has forced a partial shutdown of the government and the impending deadline to raise the country's $16.7 trillion borrowing limit.
"Obviously, we know, and you know by now, that failure to raise the debt ceiling would cause not only serious damage to the U.S. economy but also to the global economy as a result of the spillover effects," Lagarde said. "It is not helping the U.S. economy to have this uncertainty and this protracted way of dealing with fiscal issues and debt issues."
Lew delivered a similar message in testimony before the Senate Finance Committee on Thursday, pointing to a Treasury report that detailed the "potentially catastrophic impacts" if the United States ends up failing to raise the debt limit and the government defaulted on debt.
The Treasury report said that such an event, which has never happened, could result in a significant loss in the value of the dollar, markedly higher U.S. interest rates and negative spillover effects on the global economy.
As the finance officials met, members of Congress and President Barack Obama searched for a solution but appeared to make little progress on Thursday. Lew repeated a warning that he will have exhausted all the extraordinary measures that have allowed the government to keep borrowing by Oct. 17.
Lew said that just the prospect of a default had already caused interest rates to rise and he warned of worse consequences to come such as possibly missing payments of Social Security benefits and pay for active duty military troops.
Finance officials from other nations were keeping a close eye on developments in Congress. Spain's Economy Minister Luis de Guindos said the failure to reach an agreement was adding to economic uncertainty.
"It is a source of uncertainty now while we are not short of sources of uncertainty in the global economy," he said in an interview with The Associated Press. "So I think that we should try to close the issue as soon as possible."
Other finance officials expressed worries about future moves of the Federal Reserve to begin slowing economic support the U.S. central bank has provided by buying $85 billion per month in bonds to put downward pressure on interest rates.
Finance Minister Palaniappan Chidambaram of India said that the signals sent by the Fed in June that it could before the end of the year start to reduce the bond purchases had caught other nations by surprise. Many emerging markets had benefited from a surge in foreign capital as investors searched for higher returns in the face of ultra-low U.S. interest rates.
But with the Fed's signals, that money began flowing out, destabilizing foreign markets and forcing some nations to defend their own currencies through such measures as raising interest rates.
Chidambaram said that the Fed's decision in September to delay for a time any reductions would give international markets time to factor in the eventual tapering of the bond purchases. He said he expected the Fed to begin trimming its bond purchases in December or January, which he said would give India time to prepare through reforms and building its own currency reserves.
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Associated Press reporters Marjorie Olster and Matthew Pennington contributed to this report.
