The International Monetary Fund (IMF)warned that a U.S. debt default brought on by a failure to raise the nation’s debt ceiling would have “very serious repercussions” notwithstanding the uncertainty surrounding the issue.
The international lender believes that a default would have a swift and severe impact on the US economy, and that it would also likely result in higher borrowing prices for the rest of the world.
Julie Kozack, a spokeswoman for the IMF, also stated during a news conference that the United States’ government needs to be on the lookout for any potential new banking sector vulnerabilities, especially those that would arise from the shift to an environment with significantly higher interest rates.
Kozack stated that the IMF was unable to estimate the immediate effects of a US default on global economic development. In April, the Fund projected 2.8% global GDP growth for 2023. However, it warned that more financial market volatility, as seen by a steep decline in asset values and a reduction in bank lending, may cause output growth to fall to 1.0%. However, she warned that a U.S. default and greater economic turbulence throughout the world might lead to higher interest rates.
“We would want to avoid those severe repercussions,” Kozack said. “And for that reason, we again are calling on all parties to come together, reach a consensus, and resolve the matter as quickly as possible.”
A day after Democratic President Joe Biden and top congressional Republican Kevin spoke on the subject for the first time in three months, detailed discussions on extending the U.S. government’s $31.4 trillion debt ceiling began on Wednesday with Republicans continuing to insist on expenditure cutbacks. Janet Yellen, the secretary of the U.S. Treasury, has cautioned that if Congress does not increase the borrowing limit, a default on U.S. obligations could occur as early as June 1.
Kozack claimed that the IMF had praised the “decisive” steps taken by American regulators and politicians to contain the failures of three significant regional U.S. lenders in recent weeks with regard to the upheaval in the country’s banking industry.
Kozack continued by saying that the Fund would soon perform its “Article IV” annual review of U.S. economic policy. This assessment, which will be released toward the end of May, will examine the effects of pressures on regional banks, particularly any tightening of credit conditions.
Republicans in Congress and the White House are impassed on raising the debt ceiling. Its failure to be raised or suspended might lead to the first-ever American default. The amount of money that Congress permits the federal government to borrow to pay its bills is capped by the debt ceiling. The system was developed in an effort to make borrowing easier during World War I.
Prior to 1917, Congress needed to approve additional debt for each new spending measure it passed. Until recently, it has been a rather routine process. Congress has lifted the debt limit 78 times since 1960. The debt ceiling was last raised in December 2021 by $2.5 trillion, capping the limit at $31.381 trillion.
If Congress does not agree to lift the debt ceiling, the government will not have money to pay its bills and will default on its debt.
The Treasury Department has already begun to take extraordinary measures to continue to fund the government, but Yellen said she expects funding to entirely deplete in early June.