IMF chides US for fiscal folly

 The IMF said the US economy was enjoying a short-term spike as a result of quantitative easing by the US Federal Reserve Photo: Getty Images

The IMF said the US economy was enjoying a short-term spike as a result of quantitative easing by the US Federal Reserve and the fiscal package agreed by Congress and the White House late last year, but expressed reservations about the side-effects of these policies.

"Although some targeted measures in the US are justifiable at this juncture given the still weak labour and housing markets, the recently implemented stimulus is expected to deliver only a relatively small growth dividend [given its size] at a considerable fiscal cost," the IMF said in its update to the World Economic Outlook.

The IMF said the deficit would remain stuck at 10.75pc of GDP in 2011, with public debt exceeding 110pc of GDP in 2016.

"The absence of a credible, medium-term fiscal strategy would eventually drive up US interest rates, which could prove disruptive for global financial markets and for the world economy," it said. The report called for an assault on America's entitlements behemoth, and caps on discretionary spending.

The deal between President Barack Obama and Capitol Hill extended the Bush tax cuts for rich and poor alike, and added fresh spending, angering the Tea Party hard-liners. "We are much closer to the Greece-Ireland-Spain precipice than any of us would like to believe," said Congressman John Campbell.

While the US has been the most complacent about fiscal slippage, the Fund called for "urgent" action to rein in spending across the industrial world.

"Problems in Greece, and now Ireland, have reignited questions about sovereign debt sustainability and banking sector health in a broader set of euro area countries and possibly beyond. Market pressures could result in serious funding pressures for major banks and sovereigns, increasing the likelihood that problems spill over to core countries."

The Fund said investors have "not been assuaged by stress tests conducted to date" on eurozone banks. It called for more "realistic, thorough and stringent" tests to build confidence, backed by rapid moves to recapitalise crippled lenders.

The report said the EU's €440bn (£380bn) bail-out fund "must have the ability to raise sufficient resources and deploy them in a flexible manner", throwing its weight behind demands from Brussels for a doubling of the rescue machinery.

Although the IMF has raised its forecast of global growth for 2011 from 4.2pc to 4.4pc, the report says recovery remains fragile and overly dependent on government stimulus, effectively stealing growth from the future.

The Fund supports ultra-easy monetary policy in the West but acknowledged that liquidity has leaked into the emerging world and pushed up raw material costs. Non-oil commodity prices are expected to rise 11pc this year.

The IMF said credit growth is nearing danger levels in some emerging economies. "Key risks relate to overheating, a rapid rise of inflation pressures, and the possibility of a hard landing."

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.