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Hope remains for global recovery beyond US impasse

Hope remains for global recovery beyond US impasse
Senate Majority Leader Harry Reid of Nevada, left, and Sen. Chuck Schumer, D-N.Y., speak to reporters about their meeting with Senate Republicans regarding the government shutdown and debt ceiling on Capitol Hill in Washington, Saturday, Oct. 12, 2013. (AP Photo/Charles Dharapak)
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WASHINGTON (AP) — Worries about a possible U.S. debt default cast a pall over weekend meetings of global financial leaders in Washington. But they ended with some hope over signs that the U.S. and European economies are pulling out of long slumps.

During three days of talks revolving around meetings of the 188-nation International Monetary Fund and its sister lending agency, the World Bank, top officials pressed the U.S. to resolve the political impasse over the debt ceiling. The standoff has blocked approval of legislation to increase the government's borrowing limit before a fast-approaching Thursday deadline.

U.S. Treasury Secretary Jacob Lew has warned that he will exhaust his borrowing authority Thursday and the government will face the prospect of defaulting on its debt unless Congress raises the $16.7 trillion borrowing limit.

"We are now five days away from a very dangerous moment," World Bank President Jim Yong Kim warned at the closing news conference on Saturday. "I urge U.S. policymakers to quickly come to a resolution before they reach the debt ceiling deadline. The closer we get to the deadline, the greater the impact will be for the developing world."

Kim said a default would be a "disastrous event" for poorer countries. It would also be certain to derail the already fragile global economic recovery.

"We know there are problems," Tharman Shanmugaratnam, the head of the IMF's policy-steering committee and Singapore's finance minister, told a news conference at the end of the IMF meeting. "We know there are near-term risks, the most obvious one being what's going on in the U.S. with regard to the fiscal deficit."

But one of the big near-term concerns, the expectation that the U.S. Federal Reserve will start scaling back its massive stimulus program for the economy, is actually pointing to a positive development, Tharman said. It means that the U.S. economy is strong enough to withstand a reduction of the stimulus.

IMF officials have been forecasting that the strengthening U.S. economy will be a main driver of the global economy in the coming year.

At the same time, developing country economies are slowing and their markets have been unsettled since May by anticipation that the Fed will soon begin tapering its $85-billion-a-month bond purchases, which poured cash into the economy to stimulate growth.

"The eventual normalization of monetary policy as economies recover in the West will be a net positive for the emerging economies," Tharman said, meaning that the strength of the major economies will help carry the global economy forward.

Lew told finance ministers that the United States understands the role it plays as "the anchor of the international financial system" and assured them the administration was doing all it could to reach a resolution on the debt.

An effort Saturday to pass a one-year extension of the borrowing limit failed to get sufficient votes. But in a more hopeful sign, negotiations began between Democratic and Republican Senate leaders to end the impasse.

Mario Draghi, head of the European Central Bank, was one of a number of officials who were guardedly confident that an eleventh-hour deal would be reached, as it has in similar standoffs in the past.

"I still think it is unthinkable that an agreement won't be found," Draghi told reporters Saturday. "If this situation were to last a long time, it would be very negative for the U.S. economy and the world economy and could certainly harm the recovery."

But once Draghi moved beyond the U.S. impasse, he sounded upbeat about the prospects for a European recovery. That in itself is a dramatic turn from the past three years, when global financial leaders were taken up with waves of crisis sweeping across the region and necessitating a series of international rescue loans.

The IMF called on emerging economies, which have been the drivers of the global economy in recent years, to undertake reforms that will help their economies better withstand the scaling back of monetary stimulus in the U.S. and other major economies.

When the stimulus money was flowing, emerging economies benefited from investments as investors were attracted by their relatively higher rates of interest vis-a-vis the United States and other major economies.

But many of those same countries that benefited from capital flows have been rocked since May, as the investment flows reversed and flowed back toward the U.S. as rates here began to rise.

Alexandre Tombini, the head Brazil's central bank, told the IMF steering committee that the worries about the U.S. and global economies might be overblown.

"A while ago there was an excess of exuberance and now perhaps an excess of pessimism," he said.
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Applications for U.S. unemployment aid jump to 329,000 Applications for U.S. unemployment aid jump to 329,000