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Updated Oct 12, 2013 - 11:42 pm

World finance officials focus on global risks

WASHINGTON (AP) – World finance officials pledged on Saturday to deal with new
risks to the global recovery while they kept up pressure on the United States to
address the biggest threat of all – a market-rattling default on U.S. debt.

The International Monetary Fund’s policy committee said the United States
needed to take “urgent action” to address the budget impasse that has blocked
approval of legislation to increase the government’s borrowing limit before a
fast-approaching Thursday deadline.

U.S. Treasury Secretary Jacob Lew, who has shuttled between the global finance
talks and negotiations with Congress over the debt ceiling, 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 current $16.7
trillion borrowing limit.

Across town from the global finance meetings Saturday, an effort at the Capitol
to pass a one-year extension of the borrowing limit failed to get sufficient
votes. But in a more hopeful sign, negotiations to end a partial government
shutdown, now in its 12th day, and raise the debt ceiling began between
Democratic and Republican Senate leaders.

Global finance officials were nervously monitoring those talks during their
three days of discussions, held around the annual meetings of the 188-nation IMF
and its sister lending agency, the World Bank.

At a concluding news conference, World Bank President Jim Yong Kim stressed the
urgency for Washington policymakers to reach agreement on raising the debt
ceiling before the Thursday deadline.

Kim said if the debt ceiling is not increased, the economic fallout could
include increased interest rates, slower global economic growth and falling
business confidence. Such an outcome, he said, would have a “disastrous
impact” on poor nations.

Mario Draghi, head of the European Central Bank, said Saturday that he found it
“unthinkable that an agreement won’t be found.”

Draghi expressed hope that a resolution could be found soon.

“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.”

Asked what might happen if the U.S. budget debate were not resolved for six
months or more, Singapore Finance Minister Tharman Shanmugaratnam, the chairman
of the IMF committee, said it would be harmful to the entire world because it
would be a blow to the confidence that is needed for businesses to make
investment decisions.

“If we don’t clear resolution of the U.S. debt issue, it is hard to see how
that confidence will come back so it is a critical issue for all of us.”

Adopting language used Friday by the Group of 20 major economies, the IMF’s
policy panel in its closing statement said, “The United States needs to take
urgent action to address” the uncertainties created by the budget impasse.

The IMF panel called on emerging economies, which have been key in recent years
to global growth, to undertake the reforms they need to better withstand the
adjustments that will come as central banks such as the Federal Reserve begin
the process of withdrawing the economic support that has kept interest rates at
ultralow levels.

Emerging market economies benefited from investment flows as investors poured
money into those nations during the period when rates were low in the United
States and other major economies. But many of the emerging economies have been
rocked in the past few months as the investment flows reversed as investors
rushed for the exits following the Fed’s signals in June that U.S. higher rates
could be coming.

Countries such as India and Indonesia have been among the hardest hit as their
currencies and stock prices tumbled.

In addition for the need for developing countries to improve their economic
fundamentals to withstand the transition, the IMF called on the Fed and other
major central banks to pursue interest-rate policies that are “carefully
calibrated and clearly communicated.”

Critics have charged that the Fed has botched its communications strategy and
left investors confused while Fed officials contend that the economy has not
improved as expected, and because of that, it delayed an expected initial
reduction in bond purchases at the September meeting.

Now with the hit to the U.S. economy from the partial government shutdown and
the uncertainty over the debt ceiling, many economists believe the Fed will not
start trimming its $85 billion in monthly bond buys until next year after Vice
Chair Janet Yellen, who was nominated this week to succeed Fed Chairman Ben
Bernanke, takes over in February. Her nomination by President Barack Obama must
win Senate approval.

Many economists believe that once the transition has been accomplished, the
global economy should actually begin growing at better rates in part because
less support from the Fed will mean the U.S. economy is doing better and serving
as a market for foreign products.

“A while ago there was an excess of exuberance and now perhaps an excess of
pessimism,” Alexandre Tombini, the head of Brazil’s central bank, told the
International Monetary Fund’s policy-setting panel Saturday.

Lew told finance ministers that the United States understands the role it plays
as “the anchor of the international financial system.” He assured the finance
officials that the administration was doing all it could to reach a resolution
with Congress to reopen the government and increase the borrowing limit.

Russian Finance Minister Anton Siluanov, whose country currently holds the
rotating chair of the G-20, told reporters that no emergency plans had been
discussed by the group to deal with the potentially catastrophic impact on the
global economy of a U.S. debt default.

“We trust the U.S. authorities will find a way out of this complex
situation,” Siluanov said. Other finance leaders attending the meeting said
they saw the risk of default as remote.

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