U.S. debt standoff could "damage" world economy-ECB head

Reuters

NEW YORK, Oct 10 (Reuters) - A prolonged U.S. debt standoffcould hurt the global economy, European Central Bank PresidentMario Draghi said on Thursday.

The rest of the world believes the United States willresolve a deadlock that has left the federal government largelyshut down and threatens to cause a default as October wears on,he said. Nevertheless, he noted, there could be a showdown amongU.S. lawmakers that lasts weeks or even months.

"In that case, it's probably safe to say that this couldcause severe damage to the U.S. economy and to the world,"Draghi said at the Economic Club of New York ahead of attendingweekend meetings of the International Monetary Fund and WorldBank in Washington.

The U.S. federal government has been partially shut downsince Oct. 1, when Congress failed to reach an agreement onfunding for the new fiscal year due to a standoff overhealthcare reforms.

In addition, the U.S. government is expected to hit itsborrowing limit by Oct. 17, and a divided Congress might proveunable to raise that ceiling. That, in turn, raises the specterof a default.

In contrast, the euro zone economy is showing progress inrecovering from a sovereign debt crisis that has lasted morethan three years, Draghi said.

But he cautioned that the monetary union's path to furthereconomic gains will be bumpy.

"The pace of recovery is going to be subdued, uneven and tosome extent fragile, being exposed to many risks," he said.

The ECB, as expected, left its benchmark interest rateunchanged on Oct. 2 at a record low 50 basis points, a level ithas held at since May. After lifting rates in 2011, the bankreversed course and started to lower them in November of thatyear.

Not only has the sovereign debt market stabilized, Draghisaid, but banks are also finding better prospects for raisingcapital than in recent years.

That has been a major result of raising transparency, hesaid, which has been a major goal for the ECB and key torestoring the health of the monetary union's banking system.

"Transparency is the key thing. By and large people outsideEurope are convinced that if there is no more transparency, itis very unlikely they can actually invest in the bankingsystem," Draghi said.

The ECB takes over supervision of the region's banks inabout a year. A resolution mechanism to deal with problemlenders is expected to follow in 2015.

An asset quality review followed by stress tests will occurbefore the supervision starts to ensure banks are in goodhealth. The central bank is also working to create a singlemechanism to wind down failing banks.

"We've seen in the last month and a half, we have seenseveral banks capable of raising capital. So, the marketprospects are way better than they were on the occasion (of) thelast stress test two years ago," Draghi said.

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