Time is running out for US policymakers as they reach their deadline for the debt ceiling agreement, warns head of IMF Christine Lagarde. If lawmakers are unable to agree by August 2, it may result in serious consequences for the US and may even trigger an economic crisis.
26 July 2011 Last updated at 10:52 ET
The new head of the International Monetary Fund (IMF), Christine Lagarde, has warned the "clock is ticking" on a deal to tackle the US deficit and raise its debt ceiling.
Unless politicians agree a package by 2 August the US may be unable to pay its bills, triggering an economic crisis.
On Tuesday the dollar fell against the euro whilst US shares opened down.
But Ms Lagarde warned against drastic cuts in spending, saying these could create a "jobless recovery".
She also called on the EU to implement its plan to tackle sovereign debt.
Ms Lagarde took over the leadership of the IMF following the arrest of former head Dominique Strauss-Kahn in New York on charges of sexual assault.
The former French finance minister said the world economy still faced significant "downside" risks as it emerged from recession.
Speaking in New York on Tuesday, she called for an urgent deal between US lawmakers and the president to allow the US to continue borrowing money.
"The issue needs to be resolved immediately," she said.
The federal government spends more than it earns in taxes and so runs a budget deficit that topped $1.5tn (£920bn) this year. It has a national debt of $14.3tn.
But the government cannot keep borrowing money to fund its deficit without further permission from Congress.
The Republican party, which has a majority in the lower House of Representatives, is demanding steep spending cuts before they agree to a deal.
Democrat President Barak Obama and Republican House Majority Leader John Boehner have so far been unable to agree. If no deal is reached the US treasury could abruptly run out of money.
On Tuesday the dollar fell against most major currencies. US stocks also opened down due to the uncertainty.
The US dollar was at $1.6386 against the UK pound, from $1.6280 late on Monday. One euro was worth $1.447 from $1.4378.
The main Dow Jones index was 0.6% or 77 points lower at 12,516.
Ms Lagarde warned that whilst a package to cut the US deficit was essential, quick cuts in spending could damage the economy.
"That's why we've advised against fiscal consolidation that is unduly hasty - even as we stress the importance of getting a fiscal consolidation plan agreed soon," she said.
However the US was not the only concern raised by the new IMF head.
She warned that the EU sovereign debt crisis - which has so far included Greece, Ireland and Portugal - highlighted the difficulties of sharing a single currency without close economic co-ordination.
She called on EU leaders to move quickly to implement their plan on tackling the crisis.
Otherwise, she warned, "turbulence could easily re-surface on the financial markets" which had been highly volatile in the build up to the deal.
Last week, eurozone leaders agreed a new 109bn euros ($155bn, £96.3bn) bail-out for Greece and expanded the role of the European rescue fund to alleviate pressure on other indebted countries like Spain and Italy.
But despite the deal, both Spain and Italy, who have high public debts, have been forced to borrow at higher interest rates than previously.
Spain borrowed 2.9bn euros in short-term debt, paying an interest rate of 2.519% to borrow for six months, up sharply from 1.776% previously.
Italy had to pay 2.269% to borrow for the same amount of time - up from 1.988%.
Emerging fast-growing economies such as Brazil, China and India also face risks due to their rapid growth.
She called for action - such as interest rate rises - to ensure economies do not over-heat.
"Staying ahead of the curve will be essential to avoid the possible hard landing if policy action comes too late," Ms Lagarde said.
On Tuesday the Reserve Bank of India raised its main interest rate to 8% from 7.5%, the eleventh increase since March 2010.
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