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Economic crisis in Greece could reach United States, IMF warns

The economic crisis in Greece could reach the U.S. through money market funds, especially if the contagion spreads to European banks, officials from the IMF said Wednesday.
/ Source: Reuters

The economic crisis in Greece could reach the United States through money market funds, especially if the contagion spreads to European banks, officials from the International Monetary Fund said Wednesday.

"Money market mutual funds are exposed here and the United States is in a relatively stronger position than Europe," said fund's No. 2 official, John Lipsky, at a news conference.

Some financial intermediaries depend on money markets for funding in the United States, but the Federal Reserve provides a "readily available" alternative source of financing, Lipsky added.

The bigger risk of Greek contagion comes from European banks, said Gian Maria Milesi-Ferretti, an IMF economist.

"The channel of transmission through money market mutual funds would be operative, more dangerous in case the difficulties ... spill over to banks in core Europe because core European banks have significant dollar activity," he said.

Separately Wednesday, the IMF said failure by U.S. lawmakers to agree soon on a deal to raise the government's borrowing limit could deliver a "severe shock" to a still fragile recovery and global markets.

In an annual review of U.S. economic conditions, the IMF said the key challenge the country faces is finding a way to stabilize its debts by mid-decade without derailing growth, which is likely to remain modest for some time.

"And of course, the federal debt ceiling should be raised expeditiously to avoid a severe shock to the economy and world financial markets," the IMF said in a statement.

The U.S. Treasury already has hit the existing $14.3 trillion legal limit on the nation's debt and has warned the debt ceiling needs to be raised by August 2 to avoid a default on the nation's obligations.

The IMF said a failure to raise the ceiling in time could lead to a downgrade in the United States' coveted AAA debt rating and send interest rates soaring. "These risks would also have significant global repercussions, given the central role of U.S. Treasury bonds in world financial markets," it said.

The Obama administration and Congress are locked in tense negotiations to try to reach a deal on budget cuts that would give lawmakers political cover to raise the debt ceiling.

The IMF said the goal should be to stabilize the nation's debt ratio -- which it said now was unsustainable -- by mid-decade and gradually ratchet it down after that.

"We see early political agreement on a comprehensive medium-term consolidation plan based on realistic macroeconomic assumptions as a cornerstone of a credible and cyclically appropriate fiscal adjustment strategy," the IMF said.

It said the Federal Reserve's policy of keeping interest rates near zero likely will be appropriate for some time in view of modest U.S. growth prospects.

But it added the U.S. central bank must also be ready to "respond decisively" if inflation expectations appear likely to become unhinged.