World finance officials focus on global risks
World finance officials pledged Saturday to deal with new risks to the global recovery while they kept up pressure on the United States to address the biggest threat of all — a market-rattling default on U.S. debt.
The International Monetary Fund’s policy committee said the United States needed to take “urgent action” to address the budget impasse that has blocked approval of legislation to increase the government’s borrowing limit before a fast-approaching Thursday deadline.
U.S. Treasury Secretary Jack Lew, who shuttled between the global finance talks and negotiations with Congress over the debt ceiling, has warned that he will exhaust his borrowing authority Thursday and the government will face the prospect of defaulting on its debt unless Congress raises the current $16.7 trillion borrowing limit.
Global finance officials were nervously monitoring the situation during their three days of discussions, held around the annual meetings of the 188-nation IMF and its sister lending agency, the World Bank.
At a concluding news conference, World Bank President Jim Yong Kim stressed the urgency for Washington policymakers to reach agreement on raising the debt ceiling before the Thursday deadline.
Kim said if the debt ceiling is not increased, the economic fallout could include increased interest rates, slower global economic growth and falling business confidence. Such an outcome, he said, would have a “disastrous impact” on poor nations.
Mario Draghi, head of the European Central Bank, said Saturday that he found it “unthinkable that an agreement won’t be found.”
Draghi expressed hope that a resolution could be found soon.
“If this situation were to last a long time, it would be very negative for the U.S. economy and the world economy and could certainly harm the recovery.”
Asked what might happen if the U.S. budget debate were not resolved for six months or more, Singapore Finance Minister Tharman Shanmugaratnam, the chairman of the IMF committee, said it would be harmful to the entire world because it would be a blow to the confidence that is needed for businesses to make investment decisions.
“If we don’t clear resolution of the U.S. debt issue, it is hard to see how that confidence will come back so it is a critical issue for all of us.”
Adopting language used Friday by the Group of 20 major economies, the IMF’s policy panel in its closing statement said, “The United States needs to take urgent action to address” the uncertainties created by the budget impasse.
The IMF panel called on emerging economies, which have been key in recent years to global growth, to undertake the reforms they need to better withstand the adjustments that will come as central banks such as the Federal Reserve begin the process of withdrawing the economic support that has kept interest rates at ultralow levels.
Emerging market economies benefited from investment flows as investors poured money into those nations during the period when rates were low in the United States and other major economies. But many of the emerging economies have been rocked in the past few months as the investment flows reversed as investors rushed for the exits following the Fed’s signals in June that U.S. higher rates could be coming.
Countries such as India and Indonesia have been among the hardest hit as their currencies and stock prices tumbled.
In addition for the need for developing countries to improve their economic fundamentals to withstand the transition, the IMF called on the Fed and other major central banks to pursue interest-rate policies that are “carefully calibrated and clearly communicated.”
