WASHINGTON (AP) — A U.S. debt default in the event that a politically divided Congress fails to raise the federal borrowing limit would imperil the entire global economic recovery, a senior International Monetary Fund official warned Wednesday.
But Jose Vinals, the IMF's financial counselor, said he sees the actual risk of such a default as very low.
"It would be a worldwide shock," Vinals told a Washington news conference, at which the IMF released its Global Financial Stability Report.
"This is something that would have very significant repercussions on financial markets around the world, not just on the United States," Vinals said. "So let's hope that we never get there."
The report was released ahead of the IMF and World Bank's annual meeting later this week. It's a gathering that brings together leading financial officials from around the globe. The IMF said that the partial U.S. government shutdown, now in its second week, is adding to uncertainty about the still-fragile global economic recovery.
"While the damage to the U.S. economy from a short shutdown is likely to be limited, a longer shutdown could be quite harmful," the report said. "And even more importantly, a failure to promptly raise the debt ceiling, leading to a U.S. selective default, could seriously damage the global economy and financial system."
The bulk of U.S. governmental operations were shuttered last week after lawmakers in the House and Senate failed to agree on a spending bill to fund government at the start of the new fiscal year. Republicans in Congress are refusing to approve a temporary spending bill, demanding changes or elimination of Obama's 2010 health care law.
Republicans are linking the health care plan to the budget battle because they contend the costs of it could severely harm the U.S. economy. Democrats say it is legislation that has already been approved as "settled law" and that it has been upheld by the U.S. Supreme Court. They insist that spending and debt ceiling bills are vital in their own right and should not come with conditions attached.
Separately, Democrats and Republicans are also clashing as a deadline approaches for boosting the government's $16.7 trillion borrowing limit. Republicans are demanding spending cuts to reduce the budget deficit as the price for supporting an increase in the debt ceiling. The president and fellow Democrats insist that Congress first end the shutdown and extend the debt limit before any negotiations.
The worries about the U.S. economy extend beyond the shutdown and prospects, albeit remote, of a debt default.
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