By Anne VanderMey, reporter
FORTUNE -- A short-term debt-ceiling fix now appears to be the most likely outcome of the prolonged political mud fight that has shut down the government for the last 15 days. But even if lawmakers do manage to pass an extension, it will do little to resolve the larger questions over U.S. economic leadership, International Monetary Fund Managing Director Christine Lagarde said Tuesday.
Lagarde warned that a stopgap measure would bring lawmakers "back to the drawing board once again." With only two more days to go before the nation loses the ability to manage its debts, Congress appears to be lurching toward a deal that would temporarily reopen the government and extend the country's borrowing authority for at least a few more months. That, Lagarde said, will inevitably "reactivate the same sort of trepidation and anxiety and worry" that has gripped world policy makers for weeks already.
Lagarde spoke at Fortune's Most Powerful Women Summit in D.C. on Tuesday night against a backdrop of so-far unyielding partisan gridlock in Washington. She warned that if lawmakers cannot find a way to avoid a debt-ceiling breach, it could trigger global economic chaos. "It's the most serious thing that could happen," Lagarde said. "If it's not addressed, if it's not tackled, it will be very, very damaging -- not only for the U.S."
Lagarde's comments come after her recent public warnings that failure to reach a deal would wreak "massive disruption the world over." Other world leaders have echoed her concerns. During the IMF's annual meetings this weekend some 300 ministers of finance and governors of major central banks convened to talk about how to bolster the recovery. But instead of talking about the global economy's fragile growth prospects, "The only thing that was on their mind was, 'When is this [debt-ceiling fight] going to end?'"
Lagarde Tuesday had more cheerful things to say about the European political process. "Mario Draghi [president of the European Central Bank] has done an extraordinary job," she said. Trying to unite 18 countries with a single currency and a single set of fiscal policies, is incredibly difficult: "It's a job," she cracked. But she added, "they're not going to let it drop like that because of lack of courage. The courage will eventually be there to respond to the challenge. It's a huge challenge."
As for the U.S., Lagarde espouses a two-pronged approach: "I summarize it for my simple mind as, slow down but hurry up." "Hurry up" by taking measures quickly to rein in entitlement spending and inflation. Those issues "will come to haunt the economy in 2020 if nothing is done before," Lagarde said. And "slow down" by not making any cuts so sweeping or drastic that they would thwart a recovery.
Unemployment will be an increasingly critical issue, Lagarde said. There has been marked progress in the U.S. since the crisis. The unemployment rate has fallen from 10% to 7.3%. But gains are still fragile, particularly in a rapidly changing economy. "I think we are facing huge transitions," she said. Going forward, "[Americans] had better have jobs, otherwise we're not just facing economic problems, we'll be facing social problems."
Lagarde was the first woman appointed finance minister in a G8 country, and became the first female chief of the IMF in 2011. She has spoken previously about not wanting quotas for women on corporate boards, though she later reversed her stance. "Look it's working," she said. But she added that "quotas should not be a long-lasting feature because we can do better than that."
Even before she was making strides for women in the policy world, Lagarde had a colorful history. She was briefly a guide for French tourists at Alcatraz Island prison, got turned down from an elite French school twice (once because she was distracted: "I was in love that year," and once because she missed the deadline), and she was an accomplished synchronized swimmer. The takeaway from her swimming days: "Grit your teeth and smile."
In politics lately, it's a skill that has no doubt proved particularly useful.
As officials gather this weekend in Washington for the semi-annual policy meetings, Mohamed A. El-Erian assesses the problems and solutions to the IMF's twin personality.
By Mohamed A. El-Erian
FORTUNE -- The IMF is not one, but rather, two institutions: a highly respected analytical outfit anchored by superb technocrats and delivering world class insights; and an inconsistent operator that frequently falls hostage to pressure from its political masters in advanced economies MOREApr 19, 2013 5:00 AM ET
Welcome to the post-crisis era, International Monetary Fund.
The IMF's chief, Dominique Strauss-Kahn of France, was arraigned and jailed Monday in New York on charges he tried to rape a hotel maid. He is expected to resign soon. Guys who can't get bail aren't much use when it comes to bailing out others, after all, and propping up debt-soaked states like Greece, Ireland and Portugal is what the IMF does nowadays.
That said, if MOREColin Barr - May 16, 2011 2:30 PM ET
Will the Fed ever raise rates again?
At first the question seems far-fetched. Criticizing the Federal Reserve's zero-interest-rate policy is the new national pastime, thanks to a surge in commodity prices. Surely bad press and more jobs spell doom for free money, correct?
Alas no. A report issued by economists at Goldman Sachs argues that a coming wave of government belt-tightening, hailed by hawks everywhere, will actually keep central bank doves in MOREColin Barr - May 16, 2011 6:24 AM ET
This year's oil price spike has dragged the IMF kicking and screaming into the world of overstressed energy markets.
The International Monetary Fund said Monday that it expects the global oil price to average $107 a barrel this year and $108 next. That's 20% above its previous forecast, thanks to stronger-than-expected global petroleum growth in 2010 and a less than enthusiastic supply response.
Global oil demand rose 3.4% last year, the IMF MOREColin Barr - Apr 11, 2011 11:00 AM ET
Don't hold your breath for a big drop in oil prices.
So says the International Monetary Fund. Its World Economic Outlook report, released Thursday, says oil markets are facing "a period of increased scarcity."
The IMF blames surging growth in emerging markets such as China, the No. 3 global petroleum consumer, and India, the No. 5 user, at a time when big global suppliers such as Saudi Arabia are dealing with mature fields MOREColin Barr - Apr 7, 2011 1:27 PM ET
Washington continues to spend U.S. taxpayers' dollars with reckless abandon, with the IMF's bailout of Ireland being just the latest example.
by Howard Penney, Hedgeye
After the fact, the International Monetary Fund has conceded it could have done better in predicting Ireland's property and banking crash that led to last weekend's announcement of a $113 billion bailout. Nearly $30 billion of that total is being provided by the IMF, of which MOREDec 1, 2010 3:00 PM ET
Global tensions are rising, and the weapon of choice is currency.
Brazil's finance minister has spoken flatly of an "international currency war." U.S. Treasury Secretary Tim Geithner was less inflammatory but warned in a speech this week that countries acting to make their currencies cheaper could lead to a "damaging dynamic."
Everybody wants export powerhouse China to let the yuan rise, but Premier Wen Jiabao lashed out this week, saying a rapid increase could cause a destabilizing MOREColin Barr - Oct 8, 2010 10:44 AM ET
A big sovereign debt default isn't as likely as you think, the staff of the International Monetary Fund said.
Investors and commentators seem to view a default by a rich-country government as "inevitable," the IMF said in a paper released Wednesday. Thus the surging debt spreads in places like Greece, Spain, Ireland and Portugal.
But a look at history says the bond market often overreacts to signs of stress – and is MOREColin Barr - Sep 1, 2010 3:34 PM ET
The sovereign debt scare that rattled Europe this spring must serve as a "wake-up call" for reform, the IMF said Wednesday.
The International Monetary Fund said Europe must act boldly to restore confidence after a brush with insolvency in Greece fed questions about the region's future.
The IMF said it expects the euro area's economy to expand just 1% this year and 1.25% next, amid fears that surging public debt will keep growth MOREColin Barr - Jul 21, 2010 1:27 PM ET
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