MercoPress. South Atlantic News Agency

IMF calls for ‘swift rise in US debt ceiling’ and warns of risks to world economy

If no agreement is reached on time, a sudden increase in interest rates can be expected

The International Monetary Fund urged the United States to swiftly raise the debt ceiling to ward off risks of a credit downgrade that could damage the global economy.

IMF’s appeal was part of a review of US economic prospects in which it concluded a slow-paced recovery can continue with some fiscal tightening while also stressing its concern about getting government debts under control.

”Directors (on the IMF board) highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation program,“ the global lender said.

Talks between the Obama administration and lawmakers to craft a plan to avoid potential US default seemed to be making scant progress. Facing an Aug. 2 deadline after which the United States may not be able to issue more debt, both sides have so far refused to compromise on how to lift the 14.3-trillion dollars legal borrowing limit and come to grips with spending and tax issues.

The IMF, which held talks with senior administration officials while preparing its assessment, clearly opted for a broad-based plan over stop-gap measures. It said some action to rein in debts must start in fiscal 2012, which begins on Oct. 1, or the United States will face a disruptive loss of credibility.

”The strategy should include entitlement reforms, including additional savings in health care, as well as revenue increases, including by reducing tax expenditures,“ it said.

IMF staff said risks to the US outlook were rising. Those include the possibility of a sudden increase in interest rates or a sovereign downgrade in US debt - basically a decision by ratings agencies to rank the United States as less creditworthy - if agreement to raise the debt ceiling and install a medium-term plan for debt reduction is not soon reached.

”These risks would also have significant global repercussions, given the central role of US Treasury bonds in world financial markets,” the IMF said. At best, it estimated only a soft expansion for the US economy from 2012 onward, likely between 2-3/4% and 3% that would bring only moderate income gains and slow reduction in heightened unemployment rates.

That was little changed from its most recent official assessment, published in the IMF's June World Economic Outlook, in which it estimated U.S. expansion at 2.5% in 2011 and 2.7% in 2012.