The head of the International Monetary Fund, Christine Lagarde, has urged America’s warring politicians to settle their differences as she warned that an escalation of the budget row would harm the entire global economy.
Speaking ahead of the fund’s annual meeting in Washington next week, Lagarde said it was “mission critical” that Democrats and Republicans raise the US debt ceiling before the 17 October deadline.
Financial markets have started to take fright at the prospect that America could go into technical default as a result of the impasse in Washington and the IMF’s managing director said the dispute was a fresh setback for a global economy that would take at least a decade to recover from the slump of 2008-09.
“I have said many times before that the US needs to “slow down and hurry up” – by that I mean less fiscal adjustment today and more tomorrow,” Lagarde said. She added that the world’s biggest economy needed to put its finances in order, but favoured back-loaded measures to raise revenues and limit entitlement spending such as medicare that did not jeopardise short-term growth.
“In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.
“So it is ‘mission-critical’ that this be resolved as soon as possible.”
Lagarde’s speech followed an appeal by senior figures on Wall Street for a budget to be passed in Washington. Shares opened lower in New York, while the interest rate on one-month Treasury bills rose. Mario Draghi, the president of the European Central Bank, has also warned of the risks from a protracted federal shutdown.
The IMF managing director said America’s recovery was being held back by over-hasty budget cuts. “Households are in better shape, the housing sector is looking brighter, and the private sector engine is humming again. And yet, growth this year will still be too low – below 2% – due to too much fiscal adjustment. This should ease up next year, with growth about a percentage point higher.”
Lagarde said: “We at the IMF are very familiar with the ebb and flow of economic cycles, with the shift from recession to recovery. Experience tells us that this process usually takes a year or two, or a bit longer if the situation is especially severe. The transitions I am talking about today are different. They will likely play out over the rest of the decade, if not longer.”
The IMF is urging its 188 members to complete the process of financial repair deemed necessary by the near-collapse of the global banking sector five years ago. Lagarde said progress had been too slow.
“Under the old model, the financial sector took on outsized risk in pursuit of outsized rewards, causing outsized ruin – and precipitating the crisis we have been experiencing for the last five years.
“Since then, the international community has been struggling to build something better. This is not easy. It means throwing away old blueprints and designing new ones. It means dealing with the perverse incentives of financial firms and the inability or unwillingness of authorities to act.
“How is this transition doing? In the IMF’s assessment, it remains a case of ‘mission not yet accomplished’.”
This article originally appeared on guardian.co.uk