IMF chief warns a US default could spark recession

Angry protests took place outside the White House on Sunday, as Mark Mardell reports

The head of the International Monetary Fund, Christine Lagarde, has warned that a US default could tip the world into recession.

In a US TV interview, she said a default would result in "massive disruption the world over".

The US Treasury will start to run short of funds on Thursday if no agreement is reached for it to raise its debt limit.

Democratic and Republican leaders in the Senate held direct talks for the first time in weeks on Saturday.

But there is little sign of any breakthrough, correspondents say.

In an interview with NBC's Meet the Press, Christine Lagarde said America must now raise the debt ceiling before Thursday's deadline.

Christine Lagarde Christine Lagarde warns of 'massive disruption'

"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 recession," she said.

World Bank

The president of the World Bank, Jim Yong Kim, has also expressed his concern over the situation.

He warned that the United States is just "days away from a very dangerous moment" because of the government's borrowing crisis.

Mr Kim urged US policymakers to reach a deal to raise the government's debt ceiling before Thursday's deadline.

He warned this could be a "disastrous event" for the world.

"The closer we get to the deadline the greater the impact will be for the developing world.

"Inaction could result in interest rates rising, confidence falling and growth slowing," said Mr Kim, speaking at the World Bank's annual meeting in Washington.

"If this comes to pass it could be a disastrous event for the developing world and that will in turn greatly hurt the developed economies as well," he added.

Watch: The US debt ceiling explained

'Uneasy'

If the US does run short of cash, this could cause it to default on its debts, a development which would be likely to have a severe effect on financial markets around the world.

The BBC's Andrew Walker said that finance ministers from other countries think the US probably won't default, but they are uneasy and want the crisis resolved very soon.

Republicans and Democrats failed to come to an agreement on Saturday, but Senator Dick Durbin, a Democrat, said the aim was to reach a deal on extending the debt limit before markets reopen on Monday.

The White House rejected a deal for a short-term increase to the borrowing limit.

"It wouldn't be wise, as some suggest, to just kick the debt ceiling can down the road for a couple of months, and flirt with a first-ever intentional default right in the middle of the holiday shopping season," said President Barack Obama.

Shutdown

The US government has been in partial shutdown since Congress missed a 1 October deadline to pass a budget, with politicians being unable to agree funding for current spending.

This has resulted in hundreds of thousands of federal employees being sent home and government offices closing.

Republicans refused to approve the new budget unless President Obama agreed to delay or eliminate the funding of the healthcare reform law of 2010.

US Treasury Secretary Jack Lew has estimated that each week the government is shut down, 0.25% is shaved off economic growth, which was already expected to be a sluggish this quarter.

Arizona Governor Jan Brewer announces the reopening of the Grand Canyon National Park

Debt burden

Mr Lew has also warned that letting talks over the debt ceiling go down to the wire "could be very dangerous".

The current debt limit of $16.699 trillion was reached in May.

Start Quote

It would ripple through the world economy in a way that you couldn't possibly understand”

End Quote Jamie Dimon Chief executive, JP Morgan

Since then the US Treasury has been using what are called extraordinary measures to keep paying the bills, but those measures run out on 17 October.

Every week, the Treasury also has to refinance $100bn worth of debt in the form of US government bonds known as treasuries.

The US also has to pay interest on its huge debt burden.

An inability to pay that interest, or pay back debt if required, would put the US into default.

On Saturday, Jamie Dimon, boss of the American bank JP Morgan said the possible repercussions did not bear thinking about.

"You don't want to know [what would happen]," he said.

"It would ripple through the world economy in a way that you couldn't possibly understand."

More on This Story

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

BBC Business Live

  1.  
    GLAXO CHINA 06:12:

    The Chinese authorities have formally charged a British businessman and his American wife for illegally obtaining and selling private information. Peter Humphrey and Yingzeng Yu were arrested last year in connection with a wider investigation into the British pharmaceutical giant GlaxoSmithKline. The couple, who run a corporate investigation company, were employed by GlaxoSmithKline last year.

     
  2.  
    SCOTTISH INDEPENDENCE 06:08: Radio 5 live

    More from Sir Tom Hunter, he tells Wake Up to Money that Scotland's entrepreneurial spirit was "pretty much extinguished" by mining, steel making and ship building. He believes that children need to be encouraged to be entrepreneurial at school.

     
  3.  
    SCOTTISH INDEPENDENCE 06:07: Radio 5 live

    Wake Up to Money is in Aberdeen and interviews one of Scotland's richest men, Sir Tom Hunter. He says that politicians are doing voters a "disservice" in the independence debate by providing two completely different answers over what would happen to the pound if Scotland were to leave the union.

     
  4.  
    CURRENCY MARKET INVESTIGATION 06:01:
    canary wharf

    US prosecutors are offering immunity deals to junior traders in London as part of their investigation into manipulation of the currency markets, according to the lead story in this morning's Financial Times. The report says that junior staff have been offered the deals, in return for information about their superiors.

     
  5.  
    06:00: Emily Young, Business Reporter

    Morning all. The World Cup is over but don't worry the Farnborough Air Show has begun. We'll have updates from there throughout the morning.

     
  6.  
    06:00: Ben Morris Business Reporter

    Is British broadband a bit feeble? The Federation for Small Business thinks so and that's one of the issues under discussion this morning. Stay with the Business live page. You can emails us at bizlive@bbc.co.uk or tweet @bbcbusiness.

     

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.