IMF’s Lagarde Says Raising U.S. Debt Ceiling Critical

International Monetary Fund Managing Director Christine Lagarde said it’s “mission-critical” for the U.S. to raise its $16.7 trillion debt ceiling, warning policy makers that failure to do so would seriously hurt the country and the world.

The first face-to-face talks between President Barack Obama and congressional leaders failed to break the budget logjam as a partial U.S. government shutdown entered its third day, raising the prospect of a prolonged standoff extending to the borrowing limit.

“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 prepared remarks to students at George Washington University. “So it is ‘mission-critical’ that this be resolved as soon as possible.”

Lagarde’s concern echoes a report by the U.S. Treasury Department today saying that a default “has the potential to be catastrophic.” Treasury Secretary Jacob J. Lew has said the U.S. started using final extraordinary measures that will be exhausted no later than Oct. 17 to avoid a breach of the debt limit.

Less than a week before releasing new global growth forecasts, Lagarde said the fund sees expansion as subdued, even as signs of growth appear in advanced economies.

Japan’s stimulus policy seems to be working, she said, and the U.S. housing sector is improving.

The tapering of U.S. monetary stimulus, which the Federal Reserve refrained from starting last month, needs to be carefully managed, she said.

“Because the normalization of monetary policy affects so many markets and people across the globe, the U.S. has a special responsibility,” she said. The Fed should “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.”

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net