US Lacks Credibility on Debt, says IMF

Yesterday the International Monetary Fund issued a stern message to its largest shareholder, the United States. The head of fiscal affairs at the IMF said that the US lacks a credible strategy to stabilize its mounting debt.

The Financial Times reports:

In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011 at a time when its economy was growing fast enough to reduce borrowing.

The latest warning on the deficit was delivered as Barack Obama, the US president, is becoming increasingly engaged in the debate over ways to curb America’s mounting debt.

To meet the 2010 pledge by the Group of 20 countries for all advanced economies – except Japan – to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960, the IMF said. In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.

Carlo Cottarelli, head of fiscal affairs at the Fund, said: “It is a risk that if it materialises would have very important consequences ... for the rest of the world. So it is important that the US undertakes fiscal adjustment in a way sooner rather than later.”

At the moment, the US has outlined less than half of the tax increases and spending cuts necessary to bring its public debt down in the medium term, the IMF calculated. “More sizeable reductions in medium-term deficits are needed and will require broader reforms, including to social security and taxation,” the IMF said.

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No Plans to Bail Out Japan - IMF

On Thursday the International Monetary Fund said that Japan does not need financial help, and that the country has the means to get through this disaster and recover. Of course, until the full extent of the damage is known, perhaps we shouldn’t be so final.

"We do believe that what the Japanese government has been doing on the monetary side to ensure stability of their financial system and doing what is necessary to meet the needs of the people of this crisis is the appropriate policy," she said.

On Monday, the Bank of Japan injected $180 billion into its financial system to shore up the economy to weather the lasting effects of the earthquake, tsunami and possible nuclear disaster.

In the short term, Japan needs to focus on search and rescue, humanitarian and infrastructure demands, the IMF spokesman said. And the IMF considers Japan on strong footing to handle that without financial help.

"It's a strong and wealthy society, and the government has the full financial resources to address those needs," Atkinson said.

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IMF Revises U.S. Growth Down, Jobs Picture Bleak

From Reuters.com:

U.S. economic growth will be much weaker this year and in 2011 than previously thought and that dims hopes for bringing down a very high unemployment rate anytime soon, the International Monetary Fund said on Wednesday.

In a sober assessment of the U.S. outlook, the IMF pulled down its estimate for 2010 growth to 2.6 percent from the 3.3 percent it published in July and said gross domestic product or GDP will expand 2.3 percent in 2011 instead of 2.9 percent.

"The most likely prospect for the U.S. economy is for a continued but slow recovery, with growth far weaker than in previous recoveries, considering the depth of the recession," the IMF said in its World Economic Outlook published ahead of weekend semi-annual meetings of it and the World Bank.

The IMF said the main reason the U.S. recovery is so weak is that consumer spending is sluggish and suggests it is little wonder that is the case. Falling home prices have reduced household wealth, 9.6 percent of the workforce is unemployed, banks won't lend and people are scared into saving.

It says the gap between actual and potential economic output will be a lingering drag on the pace of recovery.