ECB’s Lagarde Says She Can’t Imagine US Will Default on Debt

(Bloomberg) — European Central Bank President Christine Lagarde said she doesn’t foresee the US defaulting on its debt, saying such an outcome would have dire consequences around the world.

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“I have huge confidence in the United States,” Lagarde said in an interview for CBS’s “Face the Nation” on Sunday. “I just cannot believe that they would let such a major — major — disaster happen.”

“If it did happen, it would have very, very negative impact not just for this country, where confidence would be challenged, but around the world,” Lagarde added. “I understand the politics, I’ve been in politics myself. But there is a time when the higher interest of the nation has to prevail.”

Lagarde stepped into the fray as the US stares down a potential debt default that could send shock waves through the world economy. President Joe Biden’s administration is insisting there will be no debt-limit negotiations with House Speaker Kevin McCarthy, whose Republicans have been seeking to link an increase in the ceiling to cuts in US spending.

The US Treasury Department is employing extraordinary measures to avoid a debt-limit breach, but the cap must be raised this summer to avoid a default. McCarthy is slated to give a speech to the New York Stock Exchange on Monday that’s expected to focus on the standoff.

Prominent US bankers and officials such as Treasury Secretary Janet Yellen have warned for months against bringing the US to the brink.

A similar showdown in 2011 rattled financial markets and prompted Standard & Poor’s to issue the first-ever downgrade of the US government’s credit rating. Then President Barack Obama agreed to more than $2 trillion in spending cuts over a decade to end the crisis.

Lagarde issued her warning after attending the International Monetary Fund’s Spring meetings in Washington, where finance officials from around the world discussed the economic outlook amid challenges posed by inflation and elevated debt spurred by the Covid-19 pandemic and the war in Ukraine.

Faced with pressure for further euro-area rate increases to counter inflation, Lagarde said a limited credit tightening might make the ECB’s task easier, echoing comments by Yellen.

“If they don’t lend too much credit and if they manage their risk, it might reduce the work that we have to do to reduce inflation,” Lagarde said. “But if they reduce credit too much then, it will weigh on growth excessively.”

It’s “a fine balance,” she said.

(Adds context on US debt-ceiling standoff, Lagarde’s meetings in Washington.)