The head of the European Central Bank, Christine Lagarde, stated in an interview that she does not foresee a default on US government debt, saying that such an outcome would have catastrophic consequences worldwide.
“I have a lot of faith in the United States,” Lagarde said. “I just cannot believe that they would allow such a massive catastrophe to happen.”
“If it did, it would have very negative consequences not just for that country where trust would be undermined, but for the entire world,” Lagarde added.
The US is in a debt impasse, and the Biden administration insists that negotiations on the debt ceiling with House Speaker Kevin McCarthy, who wants to condition the debt ceiling increase on spending cuts, will not take place.
The last similar case occurred in 2011 when President Barack Obama conceded and agreed to cut spending by more than $2 trillion over a decade, following the impasse that led to Standard & Poor’s downgrading the US government’s credit rating for the first time.
Lagarde and Yellen believe that the credit crisis reduces the need to raise the interest rate.
Regarding inflation in Europe and the need to raise the interest rate, Lagarde said that a limited credit crisis could make the ECB’s work easier.
“If they don’t lend too much and if they manage their risks, it could reduce the amount of work we have to do to reduce inflation,” Lagarde said. “But if they reduce lending too much, it will overly affect growth.”
Her comments echo those of US Treasury Secretary Janet Yellen, who said in an interview with CNN on Saturday that measures taken to address the systemic threat posed by the bankruptcies of Silicon Valley Bank and Signature Bank last month had stabilized deposit flows and everything was under control.
“Banks will probably become a little more cautious in this environment,” Yellen said in the interview, adding, “We have already seen some tightening of lending standards in the banking system prior to this episode, and it could happen even more in the future.”
According to her, this will result in a restriction of lending in the economy, which may replace other interest rate hikes that the Federal Reserve will have to make.