IMF chief warns against drastic US spending cuts

Drastic spending cuts could threaten global economy recovery

As debate rages over the US budget and borrowing limit, International Monetary Fund Director Christine Lagarde today warned US spending cuts must not be too drastic or they could threaten global economic recovery.

In an interview on NBC today talk show "Meet the Press," Lagarde said the United States must address its spending on social programs like Medicare and Social Security.

But she said, "The point is not to contract the economy by slashing spending brutally now, as recovery is picking up.

"The pace of consolidation has to be sensible in order to protect that growth which is generating jobs, and which is helping in all sorts of ways," Lagarde added.

The United States must deal with "entitlement (spending) that will come up and haunt you in a few years' time," she said, but the government needs "a balanced approach."

The IMF director said the US economy is already showing "real improvement," evident in indicators from the housing sector to the automobile industry to banking and household spending.

But she said it is crucial the government work out a deal to re-open the government and continue borrowing so it does not default on its debt - and not just for a few weeks.

She warned of serious consequences from "a combination of the government shutdown for a period of time and, more seriously, more damaging, if the debt ceiling was not lifted with a degree of certainty and enough time so that people could, you know, sort of have the assurance that the economy was in good standing."

"If there is that degree of disruption, that lack of certainty, that lack of trust in the US signature, it would mean massive disruption the world over. And we would be at risk of tipping, yet again, into recession," Lagarde said.

The Senate is holding a rare today session to grapple with the budget impasse, with just five days remaining before the United States is set to reach the limit of its borrowing authority, putting it at risk of defaulting on its debt for the first time.