IMF predicts global impact if U.S. Congress cannot resolve the debt crisis

By Sudeep Reddy
Wall Street Journal

A loss of investor confidence in U.S. debt could have "universally large and negative" effects on the rest of the world, the International Monetary Fund said this week in its annual assessment of the U.S. economy.

The IMF delivered its warning as the White House and Congress struggled to reach a deal to increase the federal government's borrowing limit before an Aug. 2 deadline.

The large credit-rating firms have warned they will lower their top-notch ratings on U.S. debt if the government defaults. Standard & Poor's has also said it might downgrade the debt if no credible plan is reached for reining in deficits over the long term.

A debt downgrade or failure to raise the debt ceiling would have "significant global repercussions, given the central role of U.S. Treasury bonds in world financial markets," the fund said in a staff report.

A downgrade would be "very damaging for both the US economy and the rest of the world" by hitting stock markets and pushing interest rates higher, IMF senior adviser Rodrigo Valdes told reporters. It would be new territory for U.S. debt, so "there's a lot of uncertainty," he said. "Nobody really knows what would be the true effect."

The fund said officials from other nations feared that a reassessment by markets of U.S. government finances "could lead to a rapid deterioration in global financing conditions, capital flows and possibly the value of the dollar."