"Failure to lift the debt ceiling would be a major event," Olivier Blanchard, IMF's chief economist, said at a news conference at its headquarters. (Agencies)1
The top IMF official warned that the failure to raise the debt ceiling -- that would result in the US defaulting on its international obligations – would have a long term adverse impact on the global economy and would have major consequences in the years to come.
If the debt ceiling is not lifted, there would be a direct effect on government spending, he said adding that its mechanical effect would be "very large" and would probably lead to "financial turmoil".
Noting that the effects of any failure to increase the debt ceiling would be felt "right away" in financial markets, with possible "major disruptions," he said one should not forget that the funding levels set by sequestration are "too large" and "too arbitrary.
Blanchard said emerging market economies are facing both the challenge of slowing growth and changing global financial conditions.
"The recovery from the crisis continues, but is too slow. The legacies of the crisis are very much there. Advance economies are not out of the woods," he said after releasing a report in the latest edition of the IMF's World Economic Outlook.
The report said global growth is still weak, its underlying dynamics are changing, and the risks to the forecast remain on the downside. As a result, new policy challenges are arising and policy spillovers may pose greater concern.
"In particular, markets are increasingly convinced that US monetary policy is reaching a turning point, and this has led to an unexpectedly large increase in long-term yields in the US and many other economies, notwithstanding the Federal Reserve's recent decision to maintain its asset purchases.
"This change could pose risks for emerging market economies, where activity is slowing and asset quality weakening," the report said.
Referring to the US government shutdown, the report said the projections assume that the shutdown is short, discretionary public spending is approved and executed as assumed in the forecast, and the debt ceiling - which may be reached by mid-October - is raised promptly.
Predicated on these assumptions, the recovery is projected to accelerate in late 2013 and in 2014, as the pace of fiscal consolidation slows, growth continues to benefit from monetary accommodation, household balance sheets, the report says.
"Failure to lift the debt ceiling would be a major event," Olivier Blanchard, IMF's chief economist, said at a news conference at its headquarters.