FILE PHOTO: The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S. REUTERS/Yuri Gripas/File Photo
NEW YORK: A United States debt default will cause a spike in borrowing costs that squeezes American consumers as well as cause significant harm to the world economy, International Monetary Fund (IMF) managing director Kristalina Georgieva says.
The IMF head’s comments add to several warnings about the risks of a market meltdown if Congress in Washington fails to resolve a standoff between Republicans and President Joe Biden over increasing the debt ceiling.
Global shocks such as the Covid-19 pandemic and the war in Ukraine have “taught us to be more open-minded, that the unthinkable can happen,” Georgieva said in an interview with CBS’ 60 Minutes.
“And this is why it is very important for everybody concerned to take this conversation very seriously,” she added.
Georgieva expressed hope that it won’t come to that, evoking previous battles over the debt ceiling and said that “if you look at history, usually after a lot of back and forth, a solution is found”.
With Republicans seeking to extract promises of federal budget cuts in exchange for lifting the debt limit, Biden and House Speaker Kevin McCarthy held an initial meeting at the White House last week without resolving the dispute.
Georgieva said last year’s four-decade highs in US inflation would pale in comparison to the pain that a default would cause.
“It will be very damaging for American consumers if the US defaults, that would push interest rates up,” she said. “And if people don’t like inflation today, they’re not going to like at all what may happen.”
By law, the federal government’s debt can’t exceed US$31.4 trillion (RM133.7 trillion), a cap that was reached on Jan 19.
The treasury has said it can hold out at least through early June by using special accounting manoeuvre.
The head of the Washington-based global lender warned that 60% of low-income countries are at or near a debt crisis, and reiterated her call for China, the biggest creditor to emerging countries, to cooperate with multiparty debt restructuring talks.
“China has to change its policies because low income countries cannot pay,” she said. “This is when debt restructuring becomes a top priority.”
“A roundtable of creditors, from traditional lenders to new participants like China and India, will meet in India this month,” Georgieva said.
She added that China would be represented by the finance minister and central bank governor.
Georgieva also said that the IMF has a significant role to play amid rising concern that the global economy is becoming more fragmented.
“I do consider making the case for an integrated economy our main priority today,” she said, while noting that part of that effort is to make the impacts of globalisation more fair. — Bloomberg
