–Fiscal Monitor: Adv Econ Def Reductn in 2012-13 ‘Broadly Appropriate’
–Gross Debt-GDP Ratios May Overstate Fin Pressures in Adv Econs With QE
–Central Bank Balance Sheet Unwinding Difficult W/out Fiscal Consolidtn
–Countries With Fiscal Space Should Slow Pace Of Near-Term Adjustment
By Chris Cermak
WASHINGTON (MNI) – The International Monetary Fund Tuesday said
fiscal risks in advanced economies remained elevated but “less acute”
than six months ago and continued urging countries with fiscal space to
consider easing the pace of their near-term budget cuts.
The IMF also said the focus on rising gross debt-to-GDP ratios may
be exaggerating financial pressures in economies with large-scale
central bank asset purchases, though it also warned that a lack of
longer-term fiscal consolidation could complicate central banks’ ability
to unwind their extraordinary measures.
“The focus on headline debt ratios may also overstate — in some
cases, by sizable margins — the degree of short-term financial pressure
faced by governments,” the IMF said, highlighting asset purchases by the
Federal Reserve, the Bank of England, the Bank of Japan and European
Central Bank, but warning this provided only a “temporary respite.”
In its semi-annual Global Fiscal Monitor, released ahead of this
week’s Spring Meetings, the IMF said the pace of deficit reduction in
advanced economies over the next two years is “broadly appropriate.” But
it also sees challenges in balancing near and longer-term cuts and said
some countries in stronger fiscal positions were cutting too quickly.
“Overall, fiscal risks remain elevated, although there are signs
that in some key respects they are less acute than six months ago,” the
IMF said.
The IMF cited the Eurozone’s strengthened firewall as an “important
confidence boost” to countries undergoing stiff fiscal adjustments,
while the bloc’s agreed Fiscal Compact “marks an important step forward
in ensuring great fiscal discipline … if implemented effectively.”
The IMF’s projections for fiscal deficits in major advanced
economies were slightly improved but broadly in line with its January
update. It sees advanced economies’ deficits at 5.7% of GDP on average
in 2012 (unchanged from January) and 4.5% in 2013 (down from 4.6%).
The U.S. budget deficit is seen at 8.1% of GDP in 2012 (up from
8.0% in January) and 6.3% in 2013 (down from 6.4%). The Eurozone is seen
at 3.2% in 2012 (down from 3.4% in January) and 2.7% in 2013 (down from
2.9%).
While the IMF report made clear that the long-term goal for all
advanced countries must be a return to sustainable public finances and
unwinding measures taken during the 2008 crisis, it also highlighted the
complex and shifting challenges over the near and medium term.
For countries already under severe market pressure, the IMF still
warned that overly aggressive cuts to the deficit can actually result in
increasing bond yields, because of the severe impact of such fiscal
multipliers on already-weak growth prospects.
Even for countries with supposed “fiscal space,” the IMF
acknowledged market interpretations of fiscal space can be volatile and
notes confidence “can be more easily lost than restored.” It urged those
with space and market confidence to “at a minimum” allow automatic
stabilizers to work if growth prospects worsen in 2012-13 and “consider
going further” in slowing the pace to reduce downside growth risks.
And while 85% of countries evaluated are projected to stabilize
debt ratios by 2015, the IMF said the “risk of a setback is high” as
even a “small shock” over the coming years could derail targets in many
economies.
“For many advanced economies, then, stronger medium-term adjustment
efforts could be called for to provide greater assurances about the
resilience of the public finances,” the IMF said.
On the positive side, the report said the post-2008 rise in gross
government debt-to-GDP ratios may be overstating short-term funding
pressures in some countries, given the extent of central bank asset
purchases and government investments in financial firms in the U.S.,
Britain, the Eurozone and Japan.
The IMF pointed to net debt ratios “sometimes considerably lower
than gross ratios,” though even the net ratio “remains elevated” for the
U.S. and Japan in particular. But the IMF warned authorities will be
dependent on being able to liquidate assets or rollover debt to private
markets in order to exit from these extraordinary positions.
“Large central bank purchases of government debt and other assets
may have cushioned the impact of rising debt and deficits, but they will
provide only a temporary respite,” the IMF said.
“The process of reducing central bank balance sheets will be
difficult to manage without previous or parallel medium-term fiscal
consolidation.”
To wind down the purchases over time, “governments either will have
to reduce their financing needs to allow central-bank-owned debt to be
repaid or will need to roll maturing obligations over into the private
sector.”
Some of the sizable financial assets still held by governments
could also be “difficult to liquidate in times of fiscal stress, and
their market values may be low,” the IMF said.
–Chris Cermak is a Washington reporter with Need to Know News
** MNI Washington Bureau: 202-371-2121 **
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