IMF: US Debt Defaults Will Take a Heavy Toll on Global Economy, Global GDP Growth Can Plunge

On Thursday May 11, the International Monetary Fund (IMF) said that if the United States defaulted on its debt, it would have a very serious impact on the US and global economies.

In January, U.S. federal government debt hit the legal limit of about $31.4 trillion. The U.S. Treasury then deployed so-called extraordinary measures to stave off a debt default for now, but only until early June.

U.S. Treasury Secretary Yellen has repeatedly warned that if Congress fails to raise the debt ceiling, the U.S. may default on its debt as early as June 1.

IMF spokeswoman Julie Kozak said at a news conference on Thursday that the IMF could not immediately quantify the impact of a U.S. debt default on global growth.

"Our assessment is that if the U.S. were to default on its debt, it would have a very severe impact not only on the U.S. but on the global economy," Kozak said.

The IMF predicted in April that global GDP growth would reach 2.8% in 2023, but warned that economic growth could drop to 1.0% if financial market turmoil intensifies, such as a severe pullback in asset prices and sharp cuts in bank lending.

Potential consequences of a U.S. debt default would include higher interest rates and broader instability, Kozak noted.

Banking pressure

Kozak also said on Thursday that U.S. authorities need to be vigilant about possible vulnerabilities in the U.S. banking sector in a high-interest rate environment.

Regarding the turmoil in the U.S. banking sector, Kozak said the IMF welcomed the decisive actions taken by U.S. regulators and policymakers in recent weeks.

Kozak revealed that the IMF will soon conduct its annual Article IV review of U.S. economic policy, which will be released by the end of May and will analyze the impact of stress on the banking sector.

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