IMF: A US Default Would Have Catastrophic Effects for the World Economy

May 23, 2023
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Stephanie Bedard-Chateauneuf
The International Monetary Fund warned on Thursday that a US debt default caused by a failure to extend the country's debt ceiling would have "very serious repercussions" for the US economy and the global economy, including likely higher borrowing prices.

The International Monetary Fund warned on Thursday that a US debt default caused by a failure to extend the country's debt ceiling would have "very serious repercussions" for the US economy and the global economy, including likely higher borrowing prices.

IMF spokesman Julie Kozack also stated at a news conference that US authorities must remain attentive to new vulnerabilities in the US banking system, notably regional banks, that may develop as a result of the adjustment to a much higher interest rate environment.

Kozack stated that the IMF could not instantly calculate the impact of a US default on the global economy. The Fund forecasted global GDP growth of 2.8% in 2023, but warned that more financial market volatility, including a dramatic drop in asset prices and substantial cuts in bank lending, may reduce production growth to 1.0%.

However, she stated that rising interest rates could be one of the consequences of a US default and some broader turmoil in the global economy.

A day after Democratic President Joe Biden and top congressional Republican Kevin spoke on the matter for the first time in three months, detailed discussions on raising the US government's $31.4 trillion debt ceiling began on Wednesday, with Republicans continuing to insist on expenditure cutbacks.

US Treasury Secretary Janet Yellen has warned that if Congress fails to raise the borrowing limit, a default on US obligations could occur as early as June 1.

Concerning the upheaval in the US banking industry, Kozack stated that the IMF has applauded the "decisive" efforts taken by US regulators and policymakers in recent weeks to contain the failures of three major regional US lenders.

Kozack went on to say that the Fund will shortly conduct its "Article IV" annual evaluation of U.S. economic policy, and that assessment, which will be released near the end of May, will look at the impact of pressures on regional banks, particularly any tightening of credit conditions.