U.S. Fiscal Cliff Endangers World Economy, Lagarde Tells APEC

U.S. tax increases and spending cuts set to take effect by the beginning of next year pose one of the biggest risks to the global economy, International Monetary Fund Managing Director Christine Lagarde said today.

While Lagarde has warned about the U.S. fiscal situation before, this time she took her case directly to leaders attending the Asia-Pacific Economic Cooperation Summit in Vladivostok, Russia. She said the fiscal cliff was one of “three key risks” -- the other two being the euro crisis and medium-term public financing.

“We discussed over lunch with the leaders of APEC, the global economic situation, with the three key risks that we see on the horizon,” Lagarde told reporters today. She said there are a “combination of factors that could also increase the vulnerabilities of emerging economies.”

Lagarde made the comments to an organization whose membership oversees 56 percent of global economic output. The more than $480 billion so-called fiscal cliff of automatic spending cuts and revenue changes would probably cause a recession if left unchanged, the nonpartisan Congressional Budget Office said in a report last month.

Among the leaders attending the summit were Russian President Vladimir Putin, Chinese President Hu Jintao, Secretary of State Hillary Clinton and Japanese Prime Minister Yoshihiko Noda.

Lagarde also restated the IMF’s support for the European Central Bank’s plan to buy the bonds of member nations such as Italy and Spain. Lagarde said the IMF, if it were involved, would want to help in both the design and the monitoring of any program.

“Clearly when we get involved we want to be involved both in the design and monitoring of programs,” Lagarde said. “We don’t particularly like to do monitoring without having participated actively in the design.”

To contact Bloomberg News staff for this story: Michael Forsythe in Vladivostok at mforsythe@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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