By Veronica Smith (AFP) – Jul 25, 2011
WASHINGTON — The International Monetary Fund on Monday warned the United States to lift its debt ceiling swiftly for the sake of the US and global economy.
But, with US politicians battling over a plan to slash the deficit, the IMF executive board called on authorities to only gradually reduce spending, to avert "a disruptive loss in fiscal credibility."
"The federal debt ceiling should be raised expeditiously to avoid a severe shock to the US economy and world financial markets," IMF economists said in a report on the US economy.
Executive directors called for the US to gradually unwind the extraordinary support provided the economy to deal with the 2008-2009 financial and economic crisis.
"Spillovers from credible and gradual fiscal consolidation are limited," it said, while those from a loss of confidence in US debt sustainability "are universally large and negative."
A downgrade on the United States's top-rated sovereign debt, which ratings agencies have warned could happen amid the political impasse, would reflect deep troubles in the US financial system.
The IMF has told US authorities that "it's worth (fiscal) consolidation, even if it has some negative short-run effects, because the alternative... is so complex, so difficult that it's better not to go there," Rodrigo Valdez, a senior IMF adviser, said in a conference call with reporters.
Another IMF official, Gian-Maria Milesi-Ferretti, told reporters that other countries were concerned about the risk of a "loss of confidence in the US and hence an abrupt and large depreciation of the dollar accompanied by disruptions in international financial markets."
Democratic and Republican lawmakers were in negotiations Monday trying to break a prolonged deadlock over raising the government's $14.3 trillion borrowing cap, linked to a long-term plan to reduce a swollen budget deficit.
US President Barack Obama's administration and top lawmakers failed over the weekend to reach a deal to save the world's richest country from a disastrous default on its debt on August 2.
The government hit the debt limit in mid-May but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operations.
There was little sign of an emerging consensus Monday, with Republicans who lead the House of Representatives and Democrats who control the Senate set to push rival plans. Republicans have opposed Democratic proposals to raise taxes.
The IMF economists criticized rival deficit-reduction plans proposed by the Obama administration and the Republican majority in the House of Representatives, citing the economy's tepid recovery two years after the official end of severe recession.
"The official deficit reduction proposals could be too front-loaded given the cyclical weakness and, at the same time, insufficient to stabilize the debt by mid-decade," they said in an annual review of the world's biggest economy.
The IMF projected public debt at 99.0 percent of gross domestic product this year, rising to a ratio of 103.0 percent in 2012, higher than its June estimates.
"A politically-backed medium-term framework that raises revenues and addresses long-term expenditure pressures should be the cornerstone of fiscal stabilization," it said.
"The strategy should include entitlement reforms, including additional savings in health care, as well as revenue increases, including by reducing tax expenditures," the Washington-based institution said in a separate statement on the executive board's discussions of the review.
The IMF recommended that the US deficit reduction plan include "as many specific measures as possible," and noted that clearly specified medium-term fiscal objectives were "essential."
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