IMF on G7 and the US debt ceiling

The IMF warned of negative consequences to the global economy if US leadership is unable to resolve its political impasse over negotiations to extend the debt ceiling, spokesperson Julie Kozack told reporters Thursday in Washington, DC.

“We encourage all of the interested parties to come together, reach consensus to urgently resolve the matter. And of course, the reason that we’re calling for this is because we are concerned about the severe repercussions for both the US economy, but also the global economy,” said Kozack at her first briefing to a full room of journalists since the Covid-19 pandemic.

Failure to find a way to pass legislation raising the debt ceiling could lead to the first-ever default by the US as early as June, Treasury Secretary Janet Yellen has warned. This could lead to higher interest rates for sovereign debt, increasing pressure on countries already struggling with increased borrowing costs, the IMF has warned.

But the IMF was not prepared to put a number on the potential negative impact of a default at this point on the US or global economy.

“The situation in the US, of course has is marked by some uncertainty. At the same time, we have seen resilience in the labor market in the US and in some of the underlying economic figures. So on the US, I think the bottom line is right now our April we forecast remains relevant,” said Kozack

The IMF is also urging countries ahead of the G7 meeting of Finance Ministers and leadership summit in Japan to resist pressures building to raise trade protections and ‘friend-shoring’ manufacturing.

“We see that the impact could be 0.2% of global GDP or the cost of fragmentation could be 0.2% of global GDP. But if we move into the realm of more extensive or runaway fragmentation, the costs could be as high as 7% of global global GDP. And if we add technological decoupling, the cost could rise to 12% of GDP for some countries,” Kozack explained.

“So we are encouraging countries when they look to strengthen their supply chain to do this on the basis of economic logic, as our managing director has said, and to limit these costs very much to the lower end of that, bound to to ensure that the global economy remains strong and and robust.”

IMF Managing Director Kristalina Georgieva will be traveling to Niigata and Hiroshima, Japan to take part in the meetings.