A chorus of global finance chiefs called on Thursday for the US to quickly end the political deadlock over the budget and debt ceiling to avoid wrecking the world economy.
Top finance officials from China, Europe and Latin America joined IMF managing director Christine Lagarde and World Bank president Jim Yong Kim in warning of a potential catastrophe if Washington is forced to slash spending or default on its debt.
“They should have the wisdom to solve this problem as soon as possible,” People’s Bank of China Deputy Governor Yi Gang (易鋼) said during the World Bank-IMF annual meetings in Washington, referring to demands that US Congress increases the borrowing cap.
“We certainly need a very stable global economy,” he said.
In New York, European Central Bank President Mario Draghi said a standoff between the Democrats and Republicans that lasts several weeks or months could “cause severe damage to the US economy and to the world.”
“The world still doesn’t believe that the US will not find a way out of this,” Draghi said.
As Republicans offered a short-term fix to the impasse that was not sure to be accepted by US President Barack Obama, both Lagarde and Kim highlighted the dangers.
“It is not helping the US economy to have this uncertainty, and this protracted way of dealing with fiscal issues and debt issues,” Lagarde said. “There will be very, very negative consequences for the US economy and there will be very negative consequences outside of the US economy.”
If the US is forced to default on its obligations, especially its debts, “the impacts are going to be severe,” Kim said.
In a similar Washington budget fight that went to the wire in 2011, Kim recounted, developing countries paid in terms of higher borrowing costs for months afterwards, despite it having been resolved without a US default.
“It’s an issue that concerns all of us,” Chilean Minister of Finance Felipe Larrain said. “It is a US problem, but ultimately it can kill the recovery of this economy and have a strong impact on the rest of the world.”
Karim Wissa, Egypt’s alternative executive director at the World Bank, said the Washington crisis “affects all of our countries tremendously.”
“Any positive outcome ... will be a good thing,” Wissa said.
US Secretary of the Treasury Jacob Lew told the US Senate Finance Committee on Thursday that leaving the government unable to borrow more to finance the US$60 billion a month deficit would have potentially disastrous effects.
“If Congress fails to meet its responsibility, it could be deeply damaging to the financial markets, the ongoing economic recovery, and the jobs and savings of millions of Americans,” Lew said.
The US Department of the Treasury estimates it will run out of room to move under the US$16.7 trillion borrowing limit as soon as Thursday, putting it in a position of choosing obligations for default.
China’s worries, the largest foreign holder of US debt, were echoed at several forums. At an Asian summit in Brunei, Chinese Premier Li Keqiang (李克強) expressed his “concern” about the debt cap to US Secretary of State John Kerry and in Beijing, the state-run China Daily criticized “the astonishing failure” of the US Congress.
Lagarde backed away from telling Washington’s politicians how to resolve their fight, though she has been clear that quickly increasing the debt limit is crucial for US and global stability.