IMF joins warnings about potential U.S. default

The International Monetary Fund joined the chorus of warnings against a potential U.S. default. The international banking organization lowered its global growth expectations amid the uncertainty as well as weakening economic conditions across the globe.

The Wall Street Journal had this story:

The International Monetary Fund cut its world growth forecast Tuesday amid deteriorating emerging-market prospects, urging authorities to shore up their economies as the U.S. prepares to exit its easy-money policies and wrestles with a budget impasse that threatens to derail the global recovery.

In its sixth consecutive downward revision, the IMF cut its growth forecast for this year by 0.3 percentage point to 2.9% and next year by 0.2 percentage point to 3.6%, compared with the fund’s last assessment in July.

“Two recent developments will likely shape the path of the global economy in the near term,” the fund said in its latest World Economic Outlook.

First, the pace of the Federal Reserve’s exit from its easy-money policies meant to spur growth can make or break growth. If the Fed withdraws its stimulus too fast, it could stall global growth as borrowing costs rise too quickly for many economies and fuel further emerging-market volatility as investors pull out their capital en masse.

Second, “there is strengthening conviction that China will grow more slowly over the medium term than in the recent past,” particularly as Beijing has indicated it can live with lower growth as a way to foster healthier long-term expansion of the economy. The fund cut China’s 2014 outlook nearly half a percentage point from its last forecast to 7.3%.

The WSJ story continued to discuss the state of emerging markets, offering a global and less political perspective to the coverage. It went on to detail the effects the Federal Reserve’s actions had as well as a peak in expansion for several of these countries. While emerging economies may be struggling, the New York Times story decided to focus on the American political contribution to slowing global growth:

Over all, developed economies have strengthened whereas emerging economies have weakened, the fund said. The private sector in the United States has posted better numbers, and some European countries have stopped contracting, though growth across the Continent remains weak.

“Growth is looking up, financial stability is returning and fiscal accounts are looking healthier,” Christine Lagarde, the fund’s managing director, said of developed economies at a speech this month in Washington. “Nowhere is this clearer than the United States. We see it all around us,” she said, citing improvements in housing and household finances.

Yet growth in those wealthier countries remains anemic — just 1.6 percent in the United States and 1.4 percent in Britain, with a 0.4 percent contraction in the euro area. Financial problems and recessions in Europe continue to weigh down the rest of the world, the fund said.

In Washington, budgetary turmoil has introduced new strains, including the partial government shutdown and fears that the United States might default on its debt. If the Federal Reserve pulls back, or tapers, its major bond-buying program, the global economy may also be at risk.

“U.S. monetary policy is reaching a turning point, and this has led to an unexpectedly large increase in long-term yields in the United States and many other economies,” the fund said. “This change could pose risks for emerging market economies, where activity is slowing and asset quality weakening.”

It is against the backdrop of a deadlocked Congress and shutdown federal government that the world’s finance ministers and central bankers are gathering in Washington this week. The stalemate has already led to the biggest drop in consumer confidence since Lehman Brothers collapsed, according to some measures.

Bloomberg’s story devoted about the same amount of space to talking about the Fed’s moves, China, Europe and currency volatility:

The IMF raised its forecast for the 17-country euro area to a contraction of 0.4 percent this year compared with a 0.6 percent decline in July. It now expects an expansion of 1 percent next year instead of 0.9 percent three months ago. While Italy and Spain are expected to shrink this year, Spain’s forecast contraction of 1.3 percent is an improvement from a 1.6 percent prediction three months ago.

Still, the region’s financial industry remains fragile and next year’s planned assessment of the banks’ balance sheets by the European Central Bank “provides a critical opportunity to put the system on a sounder footing,” the IMF said.

The euro-area’s central bank should also consider giving additional monetary support through lower interest rates, forward guidance on future rates or negative deposit rates, it said.

The prospect of higher U.S. long-term interest rates and a partial reversal of capital flows is leaving emerging markets with weak fiscal positions or higher inflation particularly exposed, the fund said.

USA Today led with the debt ceiling issue, pointing out the damage to the global economy:

A failure by Congress to raise the nation’s borrowing limit “could severely damage the global economy,” the International Monetary Fund said Tuesday as it trimmed its global economic forecast due to slowing growth in emerging markets.

If Congress doesn’t increase the nation’s borrowing authority this month, “It would probably lead to a lot of financial turmoil,” IMF chief economist Olivier Blanchard said at the annual meeting of the IMF and World Bank. “It would be an issue for all credit markets, including China.”

Blanchard added that the current federal government shutdown — resulting from a separate standoff over funding the government — would hurt the U.S. economy and, in turn, the global economy, only if it persisted for several weeks.

“Our assumption is that the shutdown will end and there’ll be no problem raising the debt ceiling,” Blanchard said.

Let’s hope that Blanchard is right. One thing is for certain, the U.S.-based media outlets aren’t missing a chance to tell anyone who will listen that not raising the debt ceiling will cause problems with the entire global economy. Hopefully some of the politicians are listening.