International Monetary Fund chief Kristalina Georgieva weighed in on the U.S. debt-ceiling standoff, warning in a recent interview that unless U.S. lawmakers take negotiations “very seriously,” then an “unthinkable” debt default can happen, with “very damaging” effects, including even higher interest rates and inflation.
“The biggest surprise is that the picture, while it remains very concerning, is less dire than it was just two months ago,” she said. “We are still going for a year of slowing growth. We’re still going to have interest rates relatively high because inflation hasn’t evaporated. So it is not much better. It is just less bad.”
In the United States, economic growth is expected to fall from 2.0 percent in 2022 to 1.4 percent 2023 and 1.0 percent in 2024, according to the IMF report.
The 2023 forecast is 0.4 percentage points higher than the October projection, reflecting a carryover of strong demand from the prior year. The 2024 projection is 0.2 percentage points lower due to a steeper path of rate hikes by the Federal Reserve.
In the interview, Georgieva was asked about the debt-ceiling standoff and whether a U.S. debt default is “unthinkable.”
“COVID has taught us to be more open minded, that the unthinkable can happen. Even more-so the war in Ukraine,” she replied.
“And this is why it is very important for everybody concerned to take this conversation very seriously. It will be very damaging for U.S. consumers if the U.S. defaults—that would push interest rates up. And if people don’t like inflation today, they’re not going to like at all what may happen tomorrow,” she said.
The debt-ceiling standoff comes as a new Republican majority in the House has been pushing for sharp spending cuts, while President Joe Biden has renewed his call for the GOP to agree to raise the borrowing cap without any preconditions.
“Let us commit here tonight that the full faith and credit of the United States of America will never, ever be questioned,” Biden said during Tuesday’s State of the Union address.
Much as they did in 2011, Republicans want to pair this year’s debt ceiling hike with spending cuts. Some veterans of the 2011 showdown see a tougher battle this time around.
“This year is going to be much harder than 2011, because of the shrill nature of the political discourse,” said former Rep. Charlie Bass (R-N.H.), who served in the House during that time.
Others think Washington will find a solution before the Treasury Department runs out of money.
“That’s what things like the debt ceiling are built for—they’re forcing mechanisms that create an artificial deadline,” said former Rep. Steve Stivers (R-Ohio).
‘Debt Matters’
House Speaker Kevin McCarthy (R-Calif.) said on Feb. 6 that he was in favor of a “responsible” increase in the debt cap, but insisted that no such increase would receive Republican support unless there’s some reduction in what he described as runaway spending.“The runaway spending of the last few years it’s over. Now, we must return Washington to a basic truth: debt matters.”
McCarthy said the debt crisis creates an opportunity for bipartisan cooperation on America’s finances.
“Debt limit debates have been used for nearly every successful attempt to reform federal spending and living history. Why? Because the problem only gets solved when both parties come to the table.”
McCarthy and Biden met on Feb. 1 to discuss raising the debt ceiling. Later, Biden said discussions with McCarthy were good and that he believed they could work together.
Details of IMF’s Latest Economic Outlook Report
Globally, the IMF sees headline inflation shrinking from 8.8 percent in 2022 to 6.6 percent in 2023 to 4.3 percent in 2024.But even though headline rates of inflation have fallen as fuel prices and nonfuel commodities have declined, underlying or core inflation has not yet peaked in most economies and is still “well above” pre-pandemic levels, the report cautions.
“Disinflation will take time,” the IMF said, predicting that by 2024, the projected annual headline rate of inflation will still be above pre-pandemic levels in 82 percent of the world’s nations and that core inflation will be higher in 86 percent of them.
On the upside, the IMF sees the potential for a stronger boost in numerous economies from pent-up demand and a faster fall in inflation.
On the downside, the agency sees the possibility for severe health outcomes in China due to COVID-19 holding back economic recovery, along with the potential for the war in Ukraine to escalate and that tighter global financing conditions could make debt distress worse.
Another downside risk is inflation sticking around for longer if persistent labor market tightness translates into stronger-than-expected wage growth and as commodity prices stay elevated from the war in Ukraine.
“Such developments could cause inflation expectations to de-anchor and require even tighter monetary policy,” the report warns.
There’s also a risk that lower headline inflation data could trigger sudden repricing of assets and increase financial market volatility.
“Such movements could strain liquidity and the functioning of critical markets, with ripple effects on the real economy,”
Further, if lower headline inflation figures prompt a premature easing in financial conditions, that could complicate anti-inflation policies and lead to additional monetary tightening, meaning even higher interest rates.
