IMF Warns of ‘Very Serious Repercussions’ if US Defaults on Debt Obligations

IMF Warns of ‘Very Serious Repercussions’ if US Defaults on Debt Obligations – The IMF has issued a cautionary statement about the potential consequences of the United States failing to meet its debt obligations by June 1, stating that it could result in significant impacts on the global and American economies. The IMF’s director of communications has appealed to all parties involved to collaborate, find common ground, and resolve the issue as quickly as possible.

IMF Director of Communications Julie Kozack was asked at a press briefing on Thursday about “the knock-on effects” on the global economy, particularly for emerging markets, of “the debt ceiling crisis that is happening now between the White House and Congress, with the prospect of a potential default as early as June 1.” She replied, “First, it’s important to note that these discussions in the U.S. are taking place at a time that is very difficult for the global economy.” 

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Adding: “Our assessment is there would be very serious repercussions, not only for the U.S. but also for the global economy should there be a U.S. debt default. And we strongly encourage the parties in the U.S. to come together to reach a consensus to urgently address this matter.” She was further asked to elaborate on “what some of those consequences might be for other countries, particularly developing economies.”

The IMF director said: “One of the repercussions, of course, that we would see, we could potentially see, is higher interest rates, some broader instability and economic repercussions.” Emphasizing that “we have seen a world in the last few years that have been affected by many shocks,” she stressed: “So, we would want to avoid those severe repercussions, and for that reason, we, again, are calling on all of the parties to come together, reach consensus, and resolve the matter as quickly as possible.”

In April, the IMF predicted that global output growth would decrease from 3.4% in the previous year to 2.8% in 2023, with a subsequent rise to 3% in 2024. The organization also cautioned that more severe financial market disruptions could cause output growth to plummet to 1%, which would result in a severe asset price pullback and a significant decline in bank lending. 

Recently, the U.S. Treasury Secretary Janet Yellen has warned that the government may not be able to fulfill all of its financial obligations by June 1, should Congress fail to raise or suspend the debt limit before then. The Congressional Budget Office has similarly projected that the United States could default as early as June. The IMF spokesperson was also asked about the impact of the “regional banking crisis” in the U.S. 

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Kozack said: “What we have seen is that as we have transitioned from a period of low interest rates to a period of higher interest rates, and as that transition has taken place quite rapidly, it has exposed some vulnerabilities in some banks, particularly here in the United States.” “The authorities in the U.S. have taken rapid action to address those vulnerabilities and that is most welcome. But it is very important that policymakers remain vigilant as more hidden vulnerabilities may emerge in this new high-interest rate environment,” she noted.

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