Debts to stabilize but countries still vulnerable, IMF says

Wed Oct 9, 2013 5:13pm EDT
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WASHINGTON (Reuters) - Advanced economies are cutting fiscal deficits at the fastest pace since 2011 and are on track to have debt stabilize in the next year, though at a very high level, the IMF said on Wednesday.

Serious deficit-cutting efforts in most advanced economies, with the exception of Japan, means debt is set to stabilize at an average of just below 110 percent of GDP, the International Monetary Fund said in its twice-yearly Fiscal Monitor.

But that level still leaves countries vulnerable to market shocks and could crimp growth, and the Fund urged governments to cut their debt in a way that does not hurt long-term growth.

Japan, given its huge debt burden of over 243 percent of GDP this year, will face the hardest task in cutting its debt among advanced economies, though Ireland and Spain will also have trouble, the IMF said.

It predicted Ireland's government debt should be nearly 176 percent of GDP this year before falling slightly next year, while Spain's should rise to 99 percent of GDP in 2014.

The IMF reserved its sharpest words for Japan, which has still not started on any serious austerity, and plans a stimulus to offset the impact of a sales tax hike to go into effect next year. The IMF said the country must quickly develop a debt-cutting plan if it hopes to achieve its goals of halving its deficit after interest payments by 2015, and achieving a surplus by 2020.

At the same time, the IMF suggested some European countries might consider slowing down their austerity drive due to lagging growth. An IMF official said that included Spain and France.

"They can certainly now slow down the pace, that doesn't mean stop the pace," said Martine Guerguil, deputy director of the IMF's Fiscal Affairs Department.

The IMF also highlighted growing fiscal problems in the developing world, especially in countries in the Middle East and North Africa such as Egypt, Jordan and Morocco that have deteriorating fiscal situations, as well as Pakistan.   Continued...

People walk outside the International Monetary Fund headquarters at the start of the annual IMF-World Bank fall meetings in Washington, October 8, 2013. REUTERS/Jonathan Ernst