Lagarde: 'Clock is ticking' on debt ceiling

@CNNMoney July 26, 2011: 9:28 AM ET
Christine Lagarde says U.S. must act on debt ceiling

Christine Lagarde, director of the IMF, urged the U.S. government to resolve political differences threatening the nation's credit rating.

NEW YORK (CNNMoney) -- Christine Lagarde, the managing director of the International Monetary Fund, said Tuesday the U.S. government needs to act immediately to resolve the impasse over the federal debt ceiling.

"On the debt ceiling, the clock is ticking, and clearly the issue needs to be resolved immediately," said Lagarde in a speech delivered at a conference in New York.

Lagarde, the former finance minister of France, said the U.S. government also needs to come up with a convincing plan to bring down long-term budget deficits and reduce unsustainable debt levels.

"A credible fiscal adjustment plan is needed sooner rather than later," she said.

The comments came amid a high stakes showdown between Democrats and Republicans in Washington over the nation's finances, which could result in a downgrade of the nation's credit rating if officials cannot reach an agreement before next week.

The immediate concern is that a delay in raising the federal borrowing limit, which currently stands at about $14 trillion, will impede the government's ability to meet its financial obligations as soon as Aug. 2, when the Treasury has said it will not have sufficient cash on hand.

While officials from both sides have said that avoiding a default is paramount, the parties remain far from a deal on basic issues such as spending cuts and tax increases.

Lagarde, who replaced Dominique Strauss-Kahn at the IMF last month, praised the rescue package officials in Europe announced for Greece last week, saying the hard-fought agreement should set the tone for talks in the United States.

"I'm hopeful that the political courage shown by European leaders will soon be followed by bold fiscal action in the U.S," she said.

Despite her call for urgent action, Lagarde warned that too much belt tightening in the United States could derail the nation's fragile economic recovery. She said policy makers should act now to put in place measures that would bring down deficits as the economy becomes more robust.

"The United States could be facing another jobless recovery," she said. "Again, that's 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."

The first woman to run the global financial institution, Lagarde discussed the challenges facing an increasingly interconnected global economy.

She highlighted overlapping concerns including issues related to sovereign debt, tepid global economic growth and social instability.

The IMF expects "reasonable growth" of about 4% through 2012, "but the recovery remains unbalanced, and risks are clearly to the downside," she said.

Emerging economies have been growing rapidly, but are in danger of overheating. In addition, she said the recent surge in commodities prices has raised the risk of social upheaval in the developing world.

Meanwhile, advanced economies are struggling with the fallout of the financial crisis, including high unemployment and unsustainable public debts, she said. To top of page

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