US risks tipping world into recession, warns Lagarde

Nikhil Kumar New York

Published 14/10/2013|04:00

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Massimiliano Manarinni and Elena Giacopello, from Italy, take a photo at the Statue of Liberty yesterday

American politicians risk causing a "massive disruption the world over" that could tip the global economy into another recession if politics gets in the way of raising the country's debt ceiling and the ongoing government shutdown remains unresolved, IMF head Christine Lagarde has said.

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The stark assessment by Ms Lagarde came yesterday, after news that talks between the Republican Speaker of the House of Representatives, John Boehner, and President Barack Obama had broken down, putting the onus on the Senate leadership to craft a bipartisan pact to avert what experts predict would be financial catastrophe.

The US government will hit the congressionally mandated ceiling on how much money it can borrow to fund its commitments by October 17.

If by then the $16.7 trillion (€12.3tn) limit is not raised by the legislature, the US would be forced to walk down a road usually associated with weaker economies: dishonouring its spending commitments and defaulting on its debts, an outcome that Ms Lagarde said could shatter the fragile economic recovery in the US and around the world.

"If there is that degree of disruption, that lack of certainty, that lack of trust in the US signature, it would mean massive disruption the world over, and we would be at risk of tipping yet again into a recession," she told NBC.

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The IMF chief also poured cold water on suggestions by some within the Republican camp that the government need not default if the ceiling is not raised.

Speaking to an American audience in Washington, Ms Lagarde said there was no room to get around the limit and what it meant.

"When you are the largest economy in the world, when you are the safe haven in all circumstances, as has been the case, you can't go into that creative accounting business," Ms Lagarde said.

The warning came on the heels of a communique issued on Saturday by G20 finance ministers and central bankers in which they said: "The US needs to take urgent action to address short-term fiscal uncertainties."

Domestically, a group of state governments swung into action to reopen some national parks and monuments that had been closed owing to the shutdown.

In New York, tourists were once again able to take the ferry to the Statue of Liberty after Governor Andrew Cuomo said the state would foot the daily bill of $61,600 (€45,000) to keep it open.

Meanwhile, in Washington, the Democratic Senate Majority Leader Harry Reid was in negotiations with his Republican counterpart, Mitch McConnell, as they tried to put together a deal to break the deadlock.

As talks drag on, the risk is rising of market turmoil. (© Independent News Service)

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