Lagarde Expresses Confidence in US to Avoid Default Catastrophe

Investing.com – European Central Bank President Christine Lagarde said in an interview with CBS’s (NYSE:) “Face the Nation” show on Sunday that she doesn’t expect states to default on their debt, saying such an outcome would have disastrous consequences around the world.

“I have great confidence in the United States,” Ms. Lagarde said. “I just can’t believe they would let such a big disaster happen,” she added.

“If that happened, it would have a very, very negative impact not only for this country, where trust would be damaged, but also for the whole world,” added Lagarde.

Recall that the US is at an impasse on debt, with President Joe Biden’s administration insisting that there will be no debt ceiling negotiations with the Speaker of the House of Commons. representatives, Kevin McCarthy, who wants to condition an increase in the ceiling on spending cuts.

The last similar episode dates from 2011, and led to the capitulation of President Barack Obama, who then agreed to cut spending by more than 2,000 billion dollars over a decade, after a blockage which had led the rating agency Standard & Poor’s to downgrade the US government’s credit rating for the first time.

Lagarde and Yellen think the credit crunch reduces the need to raise rates

On inflation in Europe, and the need to raise rates, Lagarde said a limited credit crunch could make the ECB’s job easier.

“If they don’t over-lend and if they manage their risk, it could reduce the work we need to do to reduce inflation,” Ms. Lagarde said. “But if they reduce credit too much, it will weigh excessively on growth.”

These remarks echo those of US Treasury Secretary Janet Yellen, who said in an interview with CNN on Saturday that the measures taken to stem the systemic threat caused by the failures of the Silicon Valley Bank and of the Signature Bank last month had stabilized deposit flows, “and that things were calm”.

“Banks are likely to become a little more cautious in this environment,” Ms Yellen said in the interview, adding, “We have already seen some tightening of lending standards in the banking system before this episode, and it could there will be more in the future”.

She judged that this would lead to a restriction of credit in the economy which “could substitute for other interest rate hikes that the Fed must make”.