The International Monetary Fund warned U.S. lawmakers Wednesday that a failure to raise the nation’s borrowing limit would pose serious risks to the global economy and financial markets.
The U.S. last month reached its $14.3 trillion borrowing limit. The U.S. Treasury has said that it can keep the country operating for a couple months by employing various bookkeeping maneuvers. But if Congress doesn’t raise the borrowing limit by Aug. 2, Treasury Secretary Timothy Geithner has said the country will default on its debt.
John Lipsky, acting managing director of the IMF, said a default “would have very serious and far-reaching consequences.” It would rattle markets and send interest rates soaring, making mortgages and other consumer loans more expensive. Lipsky expressed confidence that Congress will reach a deal before that happens.
A sharp divide among lawmakers over how to rein in the federal budget deficit has kept Congress from raising the borrowing limit. Republicans want President Barack Obama and Democrats to agree on spending cuts equal to any increase in the borrowing limit. Democrats say the deficit-reduction deal must also include some tax increases.
The IMF said enacting steep spending cuts or tax increases too quickly could hamper the U.S. recovery. It advocated raising the borrowing limit and implementing a long-term deficit-reduction strategy.
President Obama on Wednesday said that eliminating selected tax breaks for oil companies and the super-wealthy must be part of any deficit reduction plan. He also said that a bipartisan agreement is possible to cut deficits, raise the government’s debt limit and avert a threatened financial crisis.
Obama said both Democrats and Republicans must be prepared to “take on their sacred cows” as part of the deficit-reduction negotiations.
Republicans say they will not support any proposal that raises taxes.
Geithner, meanwhile, strongly criticized a Republican proposal that would prioritize interest payments on the nation’s debt and cut spending rather than raise the borrowing limit.
Geithner said in a letter addressed to Sen. Jim DeMint, a South Carolina Republican, that the idea is “a radical and deeply irresponsible departure” from previous practices by presidents of both parties. The letter was copied to 16 other Senate Republicans, including Minority Leader Mitch McConnell.
In a second letter to Sen. Ron Johnson, a Republican from Wisconsin, Geithner also criticized a separate Republican proposal to develop contingency plans in the event the debt ceiling isn’t raised. Geithner has said that there is no alternative to raising the debt ceiling.
Failure to do so would raise interest rates and therefore the government’s borrowing costs, Geithner said, and would worsen budget deficits.
The U.S. economy will grow this year and next but at a weak pace, the IMF forecasts. The fund projects the economy will expand 2.5 percent this year and 2.75 percent in 2012. Consumers are still paying off debts, which will reduce their buying power. And budget cuts at the federal, state and local levels will also reduce demand.
Lipsky noted that the fund’s forecast for this year included an expectation that growth would pick up in the second half of this year, as gas prices have retreated from their peak last month of nearly $4 a gallon. And disruptions in auto manufacturing stemming from Japan’s March 11 earthquake, which reduced the availability of key parts, is also likely to fade.
The IMF’s forecast is below recent projections by the Federal Reserve. The Fed expects the economy will grow by as much as 3.3 percent next year. Many private forecasters, however, are more pessimistic and closer to the IMF’s view.
The IMF’s warnings on the U.S. deficits echo recent statements from major credit rating agencies such as Standard & Poor’s and Moody’s. They have warned that they may have to downgrade the United States’ credit rating if a deal on the debt ceiling isn’t reached and progress toward cutting the deficits isn’t made.
Such a downgrade would have “significant global repercussions,” the IMF said, given “the central role of U.S. Treasury bonds in world financial markets.”
The budget deficit is projected to reach $1.4 trillion this year, above last year’s $1.29 trillion gap and just below a record $1.41 trillion reached in 2009.
The IMF has 187 member nations and lends money to countries with troubled finances. It also regularly reviews major national economies to look for signs of trouble that could impact the world economy.