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IMF warns countries to avoid climbing debt

Andrew Beatty

The IMF has issued a call to bickering US politicians, urging them to solve the country's debt problems before the vulnerable economy is tipped over.

The International Monetary Fund (IMF) issued a clarion call to bickering US politicians on Tuesday, urging them to solve the country’s debt problems before a still-vulnerable economy is tipped over the brink.

In a hallmark semi-annual report, the Washington-based fund warned policymakers on the other side of the US capital that, while the world’s largest economy is improving, they invite trouble by not addressing a looming debt crisis.

“The first priority for US authorities is to agree on and commit to a credible fiscal policy agenda that places debt on a sustainable track over the medium term,” the IMF said.

So far the US has avoided the type of debt crisis that has ravaged Europe—with the dollar’s safe-haven status and moderate growth providing a sizable safety net even as agencies have downgraded the country’s credit rating.

But with Washington hurtling toward November presidential polls, and with the country’s politicians gripped by a culture of permanent campaigning, time may be running out to find a solution.

US debt is expected to balloon to 90% of total economic output by 2020, “an uncomfortably high burden,” according to the IMF.

“Given the lengthy election season and ongoing gridlock in the US congress there is little chance of meaningful medium-term debt reduction before 2013,” the IMF acknowledged.

Some good news
But there was some good news.

The IMF raised US growth projections for this year to 2.1% that was up three tenths of a percentage point from a January estimate.

Still, the IMF warned: “Should growth disappoint, the lack of fiscal consolidation strategy may increase the US risk premium, which could have spill over effects for other major economies.”

The threats to growth were legion.

“A flare-up in the euro area from increased sovereign and bank stress could easily undermine confidence in the US corporate sector and thereby squeeze investment and demand undermining growth.”

The IMF predicted that US output could fall by 1.5% in the event of an intensified European crisis. That was a full 40% of the predicted drop in Europe itself.

The burden of recovery
Higher oil prices could also push up inflation and burden the recovery.

“Risks to the outlook are more balanced but still tend to the downside given fiscal uncertainty,” the IMF concluded.

In the short term the IMF warned that a rapid end to tax breaks and stimulus spending could derail the recovery, highlighting the tricky act the US faces to balance short and long-term debt.

Spending cuts will automatically come into effect and major tax breaks will end in the next year if congress does not act.

“Such a massive adjustment could significantly undermine the economic recovery,” the IMF said.

For 2013 the IMF predicted growth would be 2.4% and unemployment would fall from 7.9% this year to 7.8%.

“The outlook is for only modest increases in employment during 2012 and 2013.”

‘Growth prospects’
In its report, the IMF sharply revised its growth forecast for “emerging” central and eastern European states to 1.9% overall for 2012 and to 2.9% for 2013.

In its previous outlook published in January, the IMF had forecast 1.1% growth for the region for this year and 2.4% growth for 2013.

“Near term growth prospects in emerging Europe will be closely tied to developments in the euro area core,” the IMF said.

“Much of the spill over from the euro area slowdown in late 2011 will already have been absorbed and trade growth and manufacturing activity are expected to pick up, both in the euro area and globally, through 2012,” it added.

The emerging Europe region comprises central and eastern European countries including Turkey but excluding eurozone states Estonia, Slovakia and Slovenia, and the Czech Republic which the IMF deems to have advanced status.

Poland is seen as the region’s top performer with 2.6% growth in gross domestic product (GDP) this year, followed by 3.2% increase in 2013.

Accelerated growth
Last year, the Polish economy grew by 4.3%.

Turkey is likely to follow with 2.3% growth in 2012 and 3.2% growth a year later.

The Baltic states of Latvia and Lithuania are expected each to post 2% growth for 2012. Growth in Latvia will then accelerate to 2.5 and in Lithuania to 2.7% in 2013.

The IMF expects 2007 EU entrants Romania and Bulgaria to post mild growth this year, of 1.5% for Romania and 0.8% for Bulgaria. Growth will then accelerate to 3% in Romania and 1.5% in Bulgaria in 2013.

EU hopeful Serbia is expected to grow by 0.5% this year with a pick-up to 3% next year, while 2013 EU entrant Croatia is seen contracting by 0.5% this year and then growing by 1% in 2013.

Hungary is predicted to post zero growth this year and grow by 1.8% in 2013.

Euro champion
The Czech Republic, seen by the IMF as the region’s only advanced non-euro country, is expected to grow by 0.1% this year and by 2.1% in 2013.

Among the region’s eurozone members, 2009 entrant Slovakia is set to become the champion with 2.4% growth in 2012 accelerating to 3.1% in 2013.

Estonia, the youngest state in the 17-member eurozone which it joined in 2011, is predicted to grow by 2% this year and by 3.6% next year.

And Slovenia is forecast to contract by 1% in 2012 before growing by 1.4% in 2013.

In 2011, emerging Europe grew by 5.3%, while advanced Europe comprising the eurozone countries, Britain, the Czech Republic, Denmark, Iceland, Norway, Sweden and Switzerland grew only by 1.4%.

The IMF expects the advanced countries to contract by 0.1% in aggregate in 2012, before growing by 1.1% next year.—AFP

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