IMF chief warns of global dangers of US default

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IMF chief Christine Lagarde warned on Tuesday the clock was ticking on a US debt deal, as the dollar slid to new lows amid concerns of a looming and unprecedented default by the world's top economy.

With a week to go before the United States hits an August 2 deadline when the government runs out of funds to pay its bills, Congress remained deeply divided on raising the $14.3 trillion debt ceiling.

In a solemn late night address to the nation on Monday, Democratic President Barack Obama hit out at what he called a ‘dangerous game’ being played by rival Republicans.

"We can't allow the American people to become collateral damage to Washington's political warfare," Obama said, warning of a ‘deep economic crisis’ if the United States, still emerging from recession, defaults.

But Republican House Speaker John Boehner on Tuesday insisted: "We have a bill that is a reasonable approach -- we've negotiated with the Senate leadership -- that really is common sense."

Republicans have said they will only agree to raising the debt limit if there are accompanying measures to rein in the ballooning US deficit.

Obama has agreed to a raft of deep spending cuts, but Republicans emboldened by newly elected arch-conservative Tea Party lawmakers have refused his demand for matching revenue increases to be imposed on the rich and big corporations.

Lagarde, the new head of the International Monetary Fund (IMF), waded into the debate on Tuesday urging the two sides to find a compromise.

"The clock is irremediably ticking, and people really have to find a solution," she said in New York.

She warned a default ‘would be a very, very, very serious event. Not for the United States alone, but for the global economy at large.’

According to the IMF, US public debt will reach 99 per cent of its GDP in 2011 and 103 per cent in 2012.

World markets wobbled again as global fears spread of no end to the stalemate before next Tuesday's deadline.

US stocks fell, with the Dow Jones Industrial Average down 64 points (0.52 per cent) at midday.

European equities also dropped while the dollar slid against the euro and yen, hitting an all-time low against the safe-haven Swiss franc.

"The foreign exchange market seems to be losing faith that the US Congress will reach an agreement... This has caused a sell-off in the dollar across the board," said Kathleen Brooks, an analyst at trading group Forex.com.

Boehner has proposed a two-step plan with debt increases first to February or March 2012, and later to 2013.

And Republican House Majority Leader Eric Cantor called on the party ‘to stop grumbling and whining and to come together as conservatives and rally behind the speaker and call the president's bluff,’ a Republican source said.

But Obama has rejected the idea of a temporary debt limit increase, arguing it would leave the underlying problem unresolved and risk repeating the current crisis in six months' time.

Obama has warned of ‘Armageddon’ if the United States defaults on its debt repayments for the first time in history, which could see the US lose its coveted AAA debt rating status and plunge the global economy back into turmoil.

Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally.

The United States, still recovering from the 2008 recession with unemployment hovering around 9.2 percent, would be faced with tough choices -- meeting either its debt obligations, or reneging on government checks to the poorest, most vulnerable Americans.

The political stakes are also high ahead of the November 2012 elections, and Obama appealed to Americans to ‘make your voice heard’ to members of Congress.

Reports suggested many had heeded the call and that some congressional websites had crashed and the Congress switchboard was flooded with calls.

There are signs the standoff is exacting a political toll on both the president and Republicans ahead of next year's White House race.

Washington Post/ABC television poll showed weakening support for Obama's economic agenda, and found the percentage of people who said he has made the economy worse has jumped six points since October to 37 per cent.

But about as many people blamed Republican policies with 65 per cent disapproving of the GOP's handling of jobs compared to 52 per cent for the president.