"Prolonged failure would lead to an extreme fiscal consolidation and almost surely derail the U.S. recovery. But the effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets both in the United States and abroad. We see this as a tail risk, namely a low probability risk, but were it to happen, it would have major consequences," he said.
"Now, fiscal risks in the United States, as worrisome as they are, should not, however, lead us to lose sight of a bigger picture, and this is what you and we should be focusing on. It is difficult to do this week, but we have to try," Blanchard stated.
"In the U.S., private demand continues to be strong. On the assumption that fiscal accidents are avoided, which is the underlying assumption of our forecast, recovery should strengthen. Growth will be higher next year than it is this year. It is, therefore, time to make plans for exit from both quantitative easing and zero policy rates, although it is not time yet to implement these plans."
Speaking on emerging markets he said they are facing the challenge of slowing growth in the context of global financial conditions, tougher financial conditions.
Rupa Duttagupta, Deputy Chief of the World Economic Outlook Division, IMF Said, "For the questions on Indonesia and India, you are right that risks of higher capital outflows once unconventional policies unwind are always there. As we have seen from recent events, capital outflows have occurred more significantly in countries where the macro house had some difficulties. In this context, for India and Indonesia, it is very important to sort of maintain the credibility on both their monetary and fiscal policies. In this context, both central banks in recent months have raised their interest rates given higher inflation, which helps because inflation is still very high in both countries."