International Monetary Fund

The U.S. fiscal cliff could entail significantly more fiscal tightening (by about 3 percent of GDP) than assumed in the WEO projections. A recent Spillover Report (IMF, 2012) finds that if this risk materializes and the sharp fiscal contraction is sustained, the U.S. economy could fall into a full-fledged recession. The global spillovers would be amplified through negative confidence effects, including, for example, a global drop in stock prices. The impact of hitting the debt ceiling is more difficult to model. Political delays before the previous deadline, in summer 2011, led credit rating agencies to downgrade the United States, and major market turmoil ensued. At this stage, markets appear to consider the fiscal cliff a tail risk, given that Congress has in the past eventually reached a compromise to resolve similar high-stakes situations. However, this implies that, should this risk actually materialize, there would be a great shock to confidence that would quickly spill over to financial markets in the rest of the world. Notice that risks for a sudden fiscal withdrawal are also present in Japan: however, if they materialize, they will probably have spillovers that are not as large as those from the U.S. fiscal cliff.