US borrowing costs recently jumped in response to the Supreme Court ruling that Donald Trump cannot be prosecuted for official actions, boosting his chances of winning the presidential election in November.
The impact of a prospective second term for Mr Trump rippled through markets as traders responded to the possibility of him increasing America’s ballooning debt pile.
Predictions of greater borrowing led to yields on US Treasuries rising on Tuesday, which impacts the amount of interest the government pays buyers of its debt. Higher yields also affect global borrowing costs as the US market is typically used as a benchmark by investors to influence other countries’ interest rates.
Jerome Powell, chairman of the US Federal Reserve, urged politicians to get borrowing under control.
Speaking alongside Ms Lagarde, Mr Powell said: “The US is running a very large deficit at a time when we are at full employment.
“The level of debt that we have is not unsustainable. The path that we are on is unsustainable. That is completely non-controversial. I would have thought that this is something that should be a top-level issue.
“This should be a real focus going forward, how do we get back to a sustainable path? You cannot run these kinds of deficits in good economic times for very long.
“In the longer run, we will have to do something sooner or later, and sooner would be better than later.”
It came as S&P Global Ratings warned of a market crunch if major economies do not slash borrowing.
“Only a sharp deterioration of borrowing conditions could persuade G7 governments to implement more resolute budgetary consolidation at the present stage in their electoral cycles,” the ratings agency warned.
“We estimate that for the US, Italy and France the primary balance would have to improve by more than 2pc of GDP cumulatively for their debt to stabilise; this is unlikely to happen over the next three years.”
