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Draghi: World doesn’t believe US will default

October 10, 2013

NEW YORK (AP) — European Central Bank head Mario Draghi says a U.S. government debt default would cause “severe damage” to the American and global economies — but that the rest of the world doesn’t believe it will happen.

“The world still does not believe that the United States will not find a way out of this,” Draghi said in response to a question after a speech Thursday at the Economic Club of New York.

President Barack Obama and Republicans in the U.S. Congress are at loggerheads over legislation to raise the U.S. debt ceiling so the government can keep paying its debts past this month.

“There are two types of situation that we have to keep in mind,” Draghi said. “Firstly, an agreement is found but late, and there may be an accident in between.

“Clearly the market’s response will depend on what type of accident. It depends very much on what sort of no-payment happens.”

He went on to add: “The second situation is one where this standoff last several months, or several weeks. In that case it’s probably safe to say that this would cause severe damage to the U.S. economy and the world.”

U.S. debt securities are traded and held as safe investments throughout the global financial system and many officials and market participants say a failure to pay when they come due would cause serious disruption.

In his speech, Draghi said the eurozone economy will stay “subdued and uneven” for a while and emphasized that the bank has room to cut interest rates further to help growth.

Analysts say Draghi wants markets to know that the bank is nowhere near withdrawing its stimulus efforts, unlike the U.S. Federal Reserve. The Fed’s discussion of ending its bond-purchase stimulus has unsettled markets around the globe.

The economy in the 17 European Union member countries that use the euro as their currency grew 0.3 percent in the second quarter, beginning a modest recovery after six straight quarters of decline.

The ECB has kept its benchmark rate at a record low of 0.5 percent, despite high unemployment.


McHugh contributed from Frankfurt.

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