PARIS (MNI) – The International Monetary Fund warned Tuesday that
efforts by European countries to cut their debt and deficits too quickly
could exacerbate market tensions.
In its World Economic Outlook, the IMF said that with interest
rates for some Eurozone economies remaining very high, “further
tightening during a downturn could exacerbate rather than alleviate
market tensions through its negative impact on growth.”
The Fund said that in a period of weak global growth, countries
with stable finances should allow “automatic stabilizers” to operate,
meaning that increases in government spending for programs like
unemployment benefits should be permitted to help offset the downturn.
Since fiscal consolidation and economic reforms can take a long
time to show results, that IMF said that the European Central Bank will
have to provide “substantial and sustained liquidity support to
stabilize government debt and bank funding” until a credible Eurozone
firewall can be built.
The European Financial Stability Facility, the current temporary
bailout fund “has a limited ability to undertake this role,” the IMF
said. “It would be highly desirable to increase the size and flexibility
of the EFSF/ESM at the earliest possible opportunity,” the the report
said, referring to the European Stability Mechanism, the permanent
European bailout fund, scheduled to start operations this July.
European finance ministers meeting in Brussels on Monday agreed
that the EFSF and the ESM would be allowed to operate alongside each
other until 2014, suggesting that the combined firepower of the two
funds could be more than E750 billion.
–Paris newsroom, +33142715540; jduffy@marketnews.com
[TOPICS: M$$CR$,MFX$$$,MI$$$$,M$$EC$]