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(Kitco News)
European Central Bank President Christine Lagarde said she could not imagine the U.S. defaulting on its debt.
“I have huge confidence in the United States,” Lagarde told CBS’s Face the Nation Sunday. “I just cannot believe that they would let such a major — major — disaster happen.”
Lagarde warned that a U.S. default would have severe consequences across the globe.
“If it did happen, it would have very, very negative impact not just for this country, where confidence would be challenged, but around the world,” she added. “I understand the politics, I’ve been in politics myself. But there is a time when the higher interest of the nation has to prevail.”
The ECB president called on U.S. lawmakers to set politics aside when discussing the topic of raising the debt ceiling.
In the U.S., the Republicans said they would try to agree on a plan to lift the $31.4 trillion debt ceiling while cutting government spending.
House of Representatives Speaker Kevin McCarthy is scheduled to reveal the conditions Republicans want Democrats to follow in exchange for lifting the debt ceiling.
In the past, Biden has been firm that Congress needs to approve a “clean” debt increase — meaning without any conditions.
Back in February, Biden and McCarthy had debt-ceiling discussions. And at the end of March, Biden called on McCarthy to outline the spending cuts Republicans wanted to see in exchange for lifting the debt ceiling.
“Make no mistake: the longer President Biden waits to be sensible, to find agreement, the more likely it becomes that his administration will bumble into the first default in our nation’s history,” McCarthy tweeted ahead of his speech at the New York Stock Exchange.
U.S. Treasury Secretary Janet Yellen has repeatedly warned that a default on U.S. debt would lead to an “economic and financial catastrophe.”
Federal Reserve Chair Jerome Powell also told investors that they should not count on the U.S. central bank to protect the economy if the debt ceiling is not raised in time.
And even though the debt ceiling debate is often described as “political theatre,” as the issue gathers more importance, the unthinkable U.S. debt default scenario will weigh on markets.
The U.S. hit its borrowing limit of $31.4 trillion in late January. And the U.S. Treasury began to employ “extraordinary measures,” including suspending investments for selected government accounts, to pay all the country’s bills. And if the debt ceiling is not raised by June, the federal government could run out of money.
The last time the debt ceiling debate significantly impacted markets was in August 2011, when Republicans and Democrats could not agree and ended up raising the ceiling just hours before the deadline.
As a result, risk assets had an adverse reaction as the U.S. dollar sold off, stocks sank, and credit spreads widened. Also, Standard & Poor’s downgraded the United States’ long-term credit rating from AAA to AA+.
A similar scenario is not ruled out this time around. And as politicians battle it out, analysts expect heightened market volatility, especially closer to the June deadline.
“The impact could be economically calamitous (through a potential global recession) and disruptive for investors (for instance, through persistently higher Treasury borrowing costs),” JPMorgan warned. “If history is any guide, we expect policymakers to eventually find compromise and the impact to be short-lived.”
Lagarde’s warning comes after she attended the International Monetary Fund’s Spring meetings in Washington.
In last week’s World Economic Outlook (WEO), the IMF trimmed its 2023 global growth outlook and updated its medium-term expectations to the weakest in three decades, issuing “hard landing” warnings if interest rates remain higher for longer.
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