WASHINGTON — The International Monetary Fund chief warned the U.S. on Thursday that failure to raise the debt ceiling could do deep damage to both the American and global economies.
Christine Lagarde, speaking at a news conference, told the U.S. to "get its fiscal house in order," referring to the deadlock over passing spending and debt limit bills. Lagarde's comments began an annual meeting of global financial leaders by the IMF and World Bank.
She said the global economy is in a slow and unbalanced recovery and urged Europe to clean up its banking problems and forge ahead with a banking union.
But it the U.S. political impasse dominated the discussion at the Washington meetings. It comes at a time when the IMF and other economic experts are counting on an improving U.S. economy to help carry the fragile global economic recovery.
These new concerns are layered on top of anxiety over an expected reduction in the central bank's bond-buying program to stimulate the economy. The prospect of that reduction has put significant pressure on markets in developing countries even before it has actually begun.
The mounting worries about the U.S. mark a shift for the Washington-based IMF. After years fretting about the deep economic crisis in Europe, the focus of most concern is now in the IMF's own backyard.
The U.S. government partially shut down last week after lawmakers in the House and Senate failed to agree on a spending bill to fund the government at the start of the new fiscal year. Republicans in Congress are refusing to approve a temporary spending bill, demanding changes to or elimination of President Barack Obama's 2010 health care law. They are linking the health care law to the budget battle because they contend the law's costs could severely harm the U.S. economy. Democrats say Republicans want to challenge legislation that was approved three years ago.
Separately, Democrats and Republicans are also clashing over the approaching deadline to boost the government's $16.7 trillion borrowing limit. Republicans are demanding spending cuts to reduce the budget deficit as the price for supporting an increase in the debt ceiling.
Obama and fellow Democrats insist that Congress first end the shutdown and extend the debt limit before any negotiations. They say spending and debt ceiling bills are vital and should not come with conditions attached.
If political infighting does real damage, such as forcing a debt default, experts fear it could imperil the global recovery.
Adding to uncertainty, the Federal Reserve is expected to begin scaling back its extraordinary stimulus early next year. The $85 billion a month in bond purchases have injected cash into the sluggish economy to boost growth.
The easing will be a sign that U.S. monetary policymakers believe the economy is strong enough to stand on its own.
But the IMF is warning that managing a smooth transition away from the stimulus could prove challenging as both interest rates and market volatility rise. If the withdrawal is too rapid, it risks unsettling markets.
At the same time, Europe is emerging from a deep recession and is expected to return to only very low rates of growth.
The IMF now sees the dynamics of global growth shifting, with the U.S. expected to drive expansion in the near term, helped by European and Japanese economies recovering from their slump.
That is a departure from the Fund's assessments earlier this year that developing economies such as China, India and Brazil would be the drivers of the global economy this year.
Those emerging economies have been rocked since May by anticipation that the Fed will begin easing off stimulus.
While U.S. interest rates were low and cash was abundant, capital flowed into riskier emerging markets where rates were higher, making investments more lucrative.
But the Fed's warnings since May about the impending pullback in bond buying caused a big shift in those financial flows, sending some of that money back into the lower-risk U.S. market as interest rates rise again and growth prospects improve.
Some developing countries have seen their currencies and stock prices tumble as a result of that shift.