Leaders of the International Monetary Fund and World Bank call on US policymakers to put their fiscal house in order by ending the federal shutdown and, more importantly, raising the debt ceiling.
The United States is set to hit a debt ceiling on October 17 and if Congress doesn't raise the Treasury's ability to issue debt, the world's largest economy would be left unable to pay its bills. At the moment, it does not appear that the situation will reach that drastic climax. Republicans in the US House of Representatives on Thursday (10.10.2013) said they would vote for a bill raising the debt limit and provide enough money to fund the government for six weeks. One condition of such a bill, however, would be the opening on negotiations with President Barack Obama on the ongoing federal government shutdown.
This news was enough to boost markets in Europe with Germany's DAX index seeing its largest one-day gain in a month's time. International Monetary Fund head Christine Lagarde and World Bank leader Jim Yong Kim also commented on the serious international consequences a US default could have.
Serious global damage
Lagarde said that if the United States cannot pay its bills it would cause "serious damage not only to the US economy but also to the global economy." She called on US officials to get the "fiscal house of the United States put in order" and to carefully manage an exit from currently "highly accommodative monetary policy."
Lagarde said it was not up to the IMF to give the US leaders political suggestions on how they should manage the country's finances. She also added that the institution was in close contact with its members to discuss possible economic consequences a US default would have on the global economy and how to deal with. Lagarde, however, seemed confident that the debt ceiling would be raised. "I hope in a few weeks time we will look back and say, 'What a waste of time that was.'"
Calls for reforms
World Bank President Jim Yong Kim warned of the dire effects that poorer countries could face in the event of a US default. "The impacts are going to be severe," he said, pointing to the negative effects a default would have on stock markets that in turn would hurt US exports - 50 percent of which go to developing countries. "We hope for many, many reasons, policymakers move quickly and resolve this crisis."
The federal shutdown has not had a large effect on the global economy, but failure to raise the debt ceiling would
Kim also warned developing countries not to use uncertainty in the United States as a reason not to reform their own economies. He said developing and emerging countries had between two and three months' time to enact reforms before the US central bank begins tightening its lending policies.
"The scenario we don't want to see is countries, especially emerging market countries, saying, 'When interest rates were low, we had access to capital and didn't need to make reforms, and now that we are under pressure we can't make the reforms,'" he said. "We want to send the message, now is the time to move."