IMF head warns US debt crisis threatens world economy

IMF managing director Christine Lagarde says failure to raise the debt ceiling is a far worse threat to global economy than the current government shutdown.

The shutdown follows a budget standoff between President Obama and Congress.

But a worse problem looms. The US is up to its borrowing limit and will run out of money without agreement to lift it.

Ms Lagarde's comments were echoed by the US Treasury, which says a debt default could lead to a financial crisis as bad as 2008 or worse.

'Mission critical'

In a speech looking ahead to a decade of challenges for the world economy, Ms Lagarde said that the US government needed to fix its finances for the long term.

She said it was "mission critical" that the US agrees a new debt ceiling.

But as she has often said before, there should not be too much change in the short term because that could undermine the economic recovery.

Shutdown

US President Obama and Congressional leaders have been in political deadlock for days, which has had the effect of freezing non-essential US government functions.

The US government closed non-essential operations on Tuesday after Congress failed to strike a deal on a new budget.

The shutdown has left more than 700,000 employees on unpaid leave and closed national parks, tourist sites, government websites, office buildings, and more.

However, as one budget crisis raged in Washington DC, another one - potentially more dangerous - looms in the coming weeks.

On 17 October, the US government will run out of cash to pay its bills unless the debt ceiling is raised.

On the prospects for the world economy in general terms Ms Lagarde was cautiously positive.

She added that although the global economic outlook remained subdued, there were signs that growth was looking up and financial stability returning.

She said not only was the US picking up steam, but the eurozone was too, with a growth forecast of 1% next year. Even Japan, she said, was beginning to improve, albeit all three areas needed to make policy changes.

The IMF's latest economic forecasts will be released in a few days and will give a more detailed view of global economic health and prospects.

• Department of State will be able to operate for limited time
• Department of Defense will continue military operations
• Department of Education will still distribute $22bn (£13.6bn) to public schools, but staffing is expected to be severely hit
• Department of Energy - 12,700 staff expected to be sent home, with 1,113 remaining to oversee nuclear arsenal
• Department of Health and Human Services expected to send home more than half of staff
• The Federal Reserve, Department of Homeland Security, and Department of Justice will see little or no disruption
• US Postal Services continue as normal
• Smithsonian institutions, museums, zoos and many national parks closed