U.S. default would have far-reaching impact - IMF chief

NEW YORK Tue Jul 26, 2011 3:49pm BST

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks at the Council on Foreign Relations forum in New York July 26, 2011. REUTERS/Shannon Stapleton

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks at the Council on Foreign Relations forum in New York July 26, 2011.

Credit: Reuters/Shannon Stapleton

NEW YORK (Reuters) - A default or significant credit downgrade in the United States would be a "very very serious event," IMF chief Christine Lagarde said on Tuesday, warning it could have far-reaching consequences for the world.

The International Monetary Fund's managing director also pressed Greece to quickly implement rescue measures and a privatization program to keep its economy afloat.

"The clock is really ticking. And people have to really find the appropriate solution," she said of U.S. deadlocked talks on raising the U.S. debt ceiling by an August 2 deadline.

"Default would be terrible for the United States and for the economy at large," Lagarde told the Council on Foreign Relations.

She called on the United States to develop a credible fiscal adjustment plan to address its public debt but cautioned that near-term budget cuts could undercut an already sluggish economy.

"The United States could face another jobless recovery. That is why we've advised against fiscal consolidation that is unduly hasty -- even as we stress the importance of getting a fiscal consolidation plan agreed soon," she said.

Her warning on the dangers of not raising the $14.3 trillion (8.72 trillion pound) debt ceiling by next week came as the dollar fell across the board after U.S. President Barack Obama gave no sign of a breakthrough in deadlocked talks in a televised speech late on Monday.

The Obama administration has warned that next Tuesday the government will run out of cash to pay all its bills, raising the prospect that it could default on its debts.

"An adverse shock in the United States could have serious spillovers on the rest of the world," Lagarde cautioned.

An IMF report on the U.S. economy on Monday warned that if the debate over the debt ceiling dragged on it could further slow the U.S. economy and tip it into another recession.

Lagarde also urged European leaders to quickly implement measures agreed at a recent EU summit to tackle the euro zone's debt problems and to strengthen economic governance.

Meanwhile, market uncertainty over the Greek rescue plan, which offers Athens more cash and easier loan terms, reflects a need for further action, she said, adding that implementing economic reforms was critical for Greece.

"There is still a level of uncertainty out there which is due to (it being a) complicated agreement and there is still work to be done," Lagarde said, adding that rescue measures for Greece needed to be implemented thoroughly and quickly.

She said Greece was taking steps to sell off state assets, which was critical to reducing its debt.

"Greece has a lot of assets available," she said. "It's a question of succeeding in conducting the privatizations."

Fiscal problems in euro zone periphery states such as Greece, Portugal and Ireland revealed the risks posed by an incomplete economic and monetary union, she said.

Turning to Japan, she called for ambitious measures to tackle the country's very high public debt levels, and urged emerging economies to act to curb signs of overheating.

"Staying ahead of the curve will be essential to avoid the possible hard landing if policy action comes too late," she added.

She said the IMF continued to forecast reasonable near-term global growth of about 4 to 4.5 percent through 2012 although the recovery was unevenly spread and risks are "clearly to the downside".

(Writing by Lesley Wroughton; Editing by Chizu Nomiyama)

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