International Monetary Fund Managing Director Christine Lagarde said Thursday that a failure to raise the U.S. debt ceiling could "very seriously damage" the global economy.
"The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the U.S. economy, but the entire global economy," Lagarde said in a speech at George Washington University ahead of the 2013 World Bank-IMF Annual Meetings.
"So it is 'mission-critical' that this be resolved as soon as possible," she added.
Referring to the anticipated tapering of Federal Reserve's quantitative easing program, Lagarde this turnaround should be managed very carefully.
"Because the normalization of monetary policy affects so many markets and people across the globe, the U.S. has a special responsibility: to implement it in an orderly way, linking it to the pace of recovery and employment; to communicate clearly; and to conduct a dialogue with others," she said.
Growth momentum in emerging markets is slowing and the external environment is becoming more challenging, partly due to the anticipated exit from easy monetary policies in the U.S., Lagarde said.
Therefore, the immediate priority for them is to ride out the turbulence as smoothly as possible, spelling out some of the needed policy responses to prevent these economies getting stuck in low gear, including currency depreciation, liquidity provision, and structural reforms, she noted.
Lagarde observed that in Japan, the government's aggressive stimulus policy seems to be working, boosting GDP by about 1 percent. Deflation is coming to an end and a newfound optimism is in the air. However, still the effort is not complete, she said.
Japan also needs a credible plan to bring down its debt, which is approaching 250 percent of GDP. "The initial consumption tax increase is a welcome first step. Entitlement reform is the next one. Without these policy fundamentals, any gains made so far could easily melt away," she said.
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