IMF Warns Washington Over Debt Impasse

http://m.us.wsj.com/articles/BL-REB-20810

By 
• IAN TALLEY
 

We already know that the International Monetary Fund thinks an ongoing debt impasse in Congress could be “catastrophic.” But just to make sure Washington gets the message, the IMF’s top economist Olivier Blanchard, kicked off his press briefing on the World Economic Outlook with another alert.

The topic’s likely to be the central focus this week as finance ministers and central bankers meet in the capital this week.

While the fund says a government shutdown is likely to have a limited impact on the U.S. economy, but “failure to lift the debt ceiling, would, however, be a major event,” Mr. Blanchard said.

“A prolonged failure would lead to an extreme fiscal consolidation and almost sure derail the U.S. recovery,” he said.

That would have immediate impacts, with major disruptions in financial markets, both in the U.S. and abroad.

In its latest economic outlook, the IMF assumes Washington sorts out the mess before the gridlock forces government to default on its obligations.

“It could well be that what is now a recovery will turn into a recession or something worse,” Mr. Blanchard added.

“It’s a low probability risk,” the top economist said.

With the IMF revising its growth outlook down for the sixth consecutive quarter, that may just be another case of fund optimism, hoping for the best but fearing the worst.