NEW YORK Oct 10 A prolonged U.S. debt standoff
could hurt the global economy, European Central Bank President
Mario Draghi said on Thursday.
The rest of the world believes the United States will
resolve a deadlock that has left the federal government largely
shut down and threatens to cause a default as October wears on,
he said. Nevertheless, he noted, there could be a showdown among
U.S. lawmakers that lasts weeks or even months.
"In that case, it's probably safe to say that this could
cause severe damage to the U.S. economy and to the world,"
Draghi said at the Economic Club of New York ahead of attending
weekend meetings of the International Monetary Fund and World
Bank in Washington.
The U.S. federal government has been partially shut down
since Oct. 1, when Congress failed to reach an agreement on
funding for the new fiscal year due to a standoff over
In addition, the U.S. government is expected to hit its
borrowing limit by Oct. 17, and a divided Congress might prove
unable to raise that ceiling. That, in turn, raises the specter
of a default.
In contrast, the euro zone economy is showing progress in
recovering from a sovereign debt crisis that has lasted more
than three years, Draghi said.
But he cautioned that the monetary union's path to further
economic gains will be bumpy.
"The pace of recovery is going to be subdued, uneven and to
some extent fragile, being exposed to many risks," he said.
The ECB, as expected, left its benchmark interest rate
unchanged on Oct. 2 at a record low 50 basis points, a level it
has held at since May. After lifting rates in 2011, the bank
reversed course and started to lower them in November of that
Not only has the sovereign debt market stabilized, Draghi
said, but banks are also finding better prospects for raising
capital than in recent years.
That has been a major result of raising transparency, he
said, which has been a major goal for the ECB and key to
restoring the health of the monetary union's banking system.
"Transparency is the key thing. By and large people outside
Europe are convinced that if there is no more transparency, it
is very unlikely they can actually invest in the banking
system," Draghi said.
The ECB takes over supervision of the region's banks in
about a year. A resolution mechanism to deal with problem
lenders is expected to follow in 2015.
An asset quality review followed by stress tests will occur
before the supervision starts to ensure banks are in good
health. The central bank is also working to create a single
mechanism to wind down failing banks.
"We've seen in the last month and a half, we have seen
several banks capable of raising capital. So, the market
prospects are way better than they were on the occasion (of) the
last stress test two years ago," Draghi said.