WASHINGTON (AP) — Concerns that the political impasse in American government will derail a fragile global economic recovery will dominate a meeting of world financial leaders in Washington this week.
In the run-up to meetings of the International Monetary Fund, World Bank and the Group of 20 major economies, global financial leaders have been sounding loud warnings about the possibility of a U.S. debt default as well as potential damage from the partial government shutdown if it continues.
These new concerns are layered on top of ongoing anxiety over an expected reduction in the central bank's bond-buying program to stimulate the economy. The prospect of that reduction has put significant pressure on developing country markets even before it has actually begun.
This is especially worrying at a time when the IMF and other economic experts are counting on a strengthening U.S. economy to help carry a still-fragile global economic recovery.
"The current political deadlock in the United States is needlessly putting at risk the stability and growth not only of the U.S. but also the world economy," said Angel Gurría, head of the Organization for Economic Cooperation and Development. "This comes at a time when a fragile recovery in advanced economies was underway, and when a number of emerging economies were already facing new risks."
The mounting worries about the U.S. mark a shift for the Washington-based IMF. After years fretting about the deep economic crisis in Europe, the focus of most concern is now in the backyard.
The U.S. government partially shut down last week after lawmakers in the House and Senate failed to agree on a spending bill to fund government at the start of the new fiscal year. Republicans in Congress are refusing to approve a temporary spending bill, demanding changes or elimination of Obama's 2010 health care law. They are linking the health care plan to the budget battle because they contend the costs of it could severely harm the U.S. economy. Democrats say Republicans want to challenge legislation approved three years ago.
Separately, Democrats and Republicans are also clashing over the approaching deadline to boost the government's $16.7 trillion borrowing limit. Republicans are demanding spending cuts to reduce the budget deficit as the price for supporting an increase in the debt ceiling.
The president and fellow Democrats insist that Congress first end the shutdown and extend the debt limit before any negotiations. They say spending and debt ceiling bills are vital and should not come with conditions attached.
If political infighting here does real damage, such as forcing a debt default, experts fear it could imperil the entire global recovery.
Jose Vinals, the IMF's top financial counselor, said Wednesday that he sees the actual likelihood of a U.S. debt default as very low.
"It would be a worldwide shock," he told a news conference in Washington.
"This is something that would have very significant repercussions on financial markets around the world, not just on the United States," he added. "So let's hope that we never get there."
The government shutdown, if brief, is not expected to do serious economic damage. But it could if prolonged.
Adding to uncertainty, the Federal Reserve is expected to begin scaling back its extraordinary stimulus early next year. The $85-billion-a-month in bond purchases have injected cash into the sluggish economy to boost growth.
The easing will be a sign that U.S. monetary policymakers believe the economy is strong enough to stand on its own.
But the IMF is warning that managing a smooth transition out of the stimulus could prove challenging as both interest rates and market volatility rise. If the withdrawal is too rapid, it risks unsettling markets.
"This process will be unprecedented and complex," said Vinals, who noted that long-term market interest rates have already begun to rise in anticipation of the tapering — something that could dent economic activity and growth.
At the same time, Europe is emerging from a deep recession and is expected to return to only very low rates of growth.
The IMF now sees the dynamics of global growth shifting, with the U.S. expected to drive expansion in the near term, helped by European and Japanese economies recovering from their slump.
That is a departure from the Fund's assessments earlier this year that developing economies such as China, India and Brazil would be the drivers of the global economy this year.
Those emerging economies have been rocked since May by anticipation that the Fed will begin easing off stimulus.
While U.S. interest rates were low and cash was abundant, capital flowed into riskier emerging markets where rates were higher, making investments more lucrative.
But the Fed's warnings since May about the impending pullback in bond buying caused a big shift in those financial flows, sending some of that money back into the lower-risk U.S. market as interest rates rise again and growth prospects improve.
Some developing countries have seen their currencies and stock prices tumble as a result of that shift.
In Asia, Indonesia and India have been the hardest hit because of weaknesses in their economies such as high inflation and current account deficits.
The IMF has warned there is a risk of a new crisis in emerging markets if that turmoil grows.