Christine Lagarde, president of the European Central Bank, said she has “huge confidence” the US will not allow the country to default on its own debt during an interview on CBS’ “Face the Nation” Sunday.
“I just cannot believe that they would let such a major, major disaster happen,” Lagarde said, adding if a debt default did happen, it would have a “very, very negative impact” both in the US and around the world.
“(The US is) a major leader in economic growth around the world. It cannot let that happen,” Lagarde said.
The US government is in a partisan standoff for negotiations to resolve the debt crisis. If Congress doesn’t address the debt ceiling, the US could potentially face its first-ever default as early as this summer or as late as the fall. Lagarde said she understands politics, but “there is a time when the higher interest of a nation has to prevail.”
The former International Monetary Fund managing director remained optimistic about the recovery of the global economy, despite the Federal Reserve indicating a mild recession later this year.
“If you look at all the forecasts at the moment, it’s all positive,” Lagarde said. “It’s been slightly downgraded, but overall, we have a recovery.”
Governments and central banks have a “narrow path” to navigate, Lagarde said, and they have to “adopt the right policies.”
The IMF, of which Lagarde was the former head, holds a dimmer outlook. It now expects economic growth to slow from 3.4% in 2022 to 2.8% in 2023. Its estimate in January had been for 2.9% growth this year.
“Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the organization said in its latest report.
Economists predict banks are getting more cautious about lending money after the collapse of Silicon Valley Bank in March, escalating fears of a credit crisis.
Lagarde said the ECB will have to measure the effects of bank activity in the US and Switzerland. The collapse of Silicon Valley Bank and Signature Bank, as well as Swiss banking giant Credit Suisse being forced to merge with UBS, induced turmoil in the banking sector.
“If (banks) 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 reduced too much credit, then it will weigh on growth excessively.”
Regarding China, Lagarde said she understands the competition between the two countries but hopes they can have a dialogue. She said trade should not be confrontational between China and the US.
“I’m on the same page as Henry Kissinger or Kevin Rudd, the new Australian Ambassador (to the US),” Lagarde said. “Conflict is not unavoidable.”
“Choosing” between the US and China economies would “lead to economic downside the amount of which is uncertain.”