IMF Warns of Serious Economic Impact from US Default on Debt

ASEAN Members Agree to Reduce Use of US Dollar (photo: lucas Favre - Unsplash)

The International Monetary Fund (IMF) has warned of the serious consequences of a US default on debt caused by the failure to raise the debt ceiling, which could have a significant impact on the US and global economies.

According to a report by Bloomberg on Friday, IMF spokesperson Julie Kozack stated that the IMF has not yet been able to measure the impact of a US default on global growth.

However, Kozack highlighted that an increase in interest rates could be one of the consequences of a US debt default, along with significant global economic instability.

In its April projections, the IMF predicted global economic growth of 2.8% for 2023, but emphasized that deeper financial market volatility, marked by asset price declines and bank credit cutbacks, could reduce growth to 1%.

Kozack warned that the US government needs to remain vigilant against new vulnerabilities in the US banking sector, including regional banks, that could emerge in response to higher interest rates.

“We want to avoid these negative impacts. And for that reason, we are again calling on all parties to come together, reach consensus, and solve this problem as soon as possible,” she said in a press statement on Thursday.

Detailed discussions on raising the US government’s debt ceiling of $31.4 trillion began this week on Wednesday. The Republican Party is insisting on spending cuts if the debt ceiling is to be raised.

Earlier, US President Joe Biden of the Democratic Party and congressional leaders from the Republican Party, including House Speaker Kevin McCarthy, met to discuss the debt ceiling issue.

US Treasury Secretary Janet Yellen has warned that a US debt default could occur on June 1 if Congress fails to raise the debt ceiling before then.

Regarding the turmoil in the US banking sector, Kozack stated that the IMF welcomes the decisive action taken by US regulators and policymakers to address the failure of three regional US banks in recent weeks.

Kozack added that the IMF will soon conduct its annual “Article IV” review of US economic policies, and that assessment, which will be issued in late May, will analyze the impact of pressure on regional banks, including tighter credit conditions.

The potential consequences of a US debt default are causing concern among experts and policymakers around the world, as it could trigger a global economic crisis.

The IMF’s warning is a reminder of the urgent need for US political leaders to find a solution to the debt ceiling issue and avoid a potential economic disaster. The ongoing discussions on the debt ceiling are likely to continue to attract widespread attention and scrutiny as the deadline for action draws nearer.