IMF Says ‘Urgent Action’ Needed On Debt Ceiling – Who Asked Them?

October 12, 2013: The IMFC meeting begins during the World Bank/IMF Annual Meetings at IMF headquarters Saturday in Washington. World finance officials prepared to wrap up three days of meetings in Washington, where fretting about the risk of an unprecedented U.S. debt default overshadowed myriad worries about a shaky global economic recovery. ( AP Photo)

WASHINGTON –  Giving a bit of unsolicited advice, the IMF weighed in on the U.S. budget impasse and the debt ceiling increase needed before Oct. 17.

World finance officials pledged on Saturday to deal with new risks to the global recovery and keep applying pressure on the United States to address what they see as the biggest financial threat — a market-destroying default on U.S. debt.

The International Monetary Fund’s policy committee said the United States needed to take “urgent action” to address the budget impasse that has blocked approval of legislation to increase the government’s borrowing limit before a fast-approaching Thursday deadline.

Every American should question why an international institution would help perpetuate the fear attached to an out-right lie, because the U.S. will not default on its debt if the debt ceiling is not increased. Even after a memo released by Moody’s last week noted that there is “no direct connection” to the debt ceiling and default, debt proponents continue to ignore the fact that the U.S. takes in adequate monthly revenue to meet its obligations.

U.S. Treasury Secretary Jacob Lew, who has shuttled between the global finance talks and negotiations with Congress over the debt ceiling, has warned that he will exhaust his borrowing authority Thursday and the government will face the prospect of defaulting on its debt unless Congress raises the current $16.7 trillion borrowing limit. But despite the fear mongering, the IMF is more concerned with receiving their U.S. aid, then they are about the actual fabricated risk of default.

Global finance officials were paying close attention to congressional talks during their three days of discussions, held around the annual meetings of the 188-nation IMF and its sister lending agency, the World Bank.

At a concluding news conference, World Bank President Jim Yong Kim, stressed the urgency for Washington policymakers to reach agreement on raising the debt ceiling before the Thursday deadline.

Kim said if the debt ceiling is not increased, the economic fallout could include increased interest rates, slower global economic growth and falling business confidence. Such an outcome, he said, would have a “disastrous impact” on poor nations.

Mario Draghi, head of the European Central Bank, said Saturday that he found it “unthinkable that an agreement won’t be found.” Draghi expressed hope that a resolution could be found soon saying, “If this situation were to last a long time, it would be very negative for the U.S. economy and the world economy and could certainly harm the recovery.”

Asked what might happen if the U.S. budget debate were not resolved for six months or more, Singapore Finance Minister Tharman Shanmugaratnam, the chairman of the IMF committee, said it would be harmful to the entire world because it would be a blow to the confidence that is needed for businesses to make investment decisions.

“If we don’t clear resolution of the U.S. debt issue, it is hard to see how that confidence will come back so it is a critical issue for all of us.” The IMF policy panel in its closing statement said, “The United States needs to take urgent action to address” the uncertainties created by the budget impasse.

The IMF called on emerging economies, which have been essential to global growth with the debt-ridden U.S. economy slugging  along, to implement reforms needed to better withstand the adjustments that will come as central banks, such as the Federal Reserve withdrawing the economic support that has kept interest rates at ultralow levels by ceasing the printing of money in quantitative easing.

Emerging market economies benefit redistributionist IMF policies that create investment flows as investors put money into those nations during the period when rates are low in the United States. But many of the emerging economies have been hit pretty hard in the past few months, because the investment flows reversed as investors took to safe havens following the Fed’s signals in June that U.S. higher rates could be coming.

Countries, such as India and Indonesia, have been among the hardest hit as their currencies and stock prices tumbled.

In addition for the need for developing countries to improve their economic fundamentals to withstand the transition, the IMF called on the Fed and other major central banks to pursue interest-rate policies that are “carefully calibrated and clearly communicated,” which translates into “please keep pumping out low rates and debt so that we can redistribute the wealth into economies in the Global South.”

Critics claim that the Fed has botched its communications strategy, leaving investors blind to their next move, while Fed officials contend that the economy has not improved as expected.

Now with the hit to the U.S. economy from the partial government shutdown and the uncertainty over the debt ceiling, many economists believe the Fed will not pull back on its $85 billion in monthly bond buys until next year after Vice Chair Janet Yellen, who was nominated this week to succeed Fed Chairman Ben Bernanke, takes over in February. Her nomination by President Barack Obama must seek Senate approval, but is considered a safe bet to do so, because she is a rubber stamp for quantitative easing.

Many economists believe that once the transition has been accomplished, the global economy should actually begin growing at better rates in part because less support from the Fed translates into a stronger U.S. economy, which green lights the U.S. serving as a market for foreign products.

“A while ago there was an excess of exuberance and now perhaps an excess of pessimism,” Alexandre Tombini, the head of Brazil’s central bank, told the International Monetary Fund’s policy-setting panel Saturday.

Lew told finance ministers that the United States understands the role it plays as “the anchor of the international financial system.” He assured the finance officials that the administration was doing all it could to reach a resolution with Congress to reopen the government and increase the borrowing limit.

Russian Finance Minister Anton Siluanov — whose country currently holds the rotating chair of the G-20 — told reporters that no emergency plans were discussed by the group to deal with the so-called catastrophic impact on the global economy in the event of a U.S. debt default.

“We trust the U.S. authorities will find a way out of this complex situation,” Siluanov said. Action speaks louder than words as they say, so the fact that no contingency plan was discussed reveals that a default is not a cataclysmic as the rhetoric suggests. In fact, other finance leaders attending the meeting said they saw the risk of default as remote.