Irish Economy
Return to normal growth in Ireland may take up to 10 years says IMF chief; Japan and US warned on debt challenges
By Michael Hennigan, Founder and Editor of Finfacts
Jan 28, 2011 - 4:19 AM

Some countries on Europe's periphery (south and north-west rather than east!) could take up to 10 years to return to a normal growth trend, after they face a “very tough” period of fixing their budgets, the IMF's chief economist Olivier Blanchard said on Thursday. Also yesterday, the IMF (International Monetary Fund) issued an update of its Fiscal Monitor and  warned Japan and the US of the need to address rising public debt.

“It is very clear that the adjustment process that these countries will have to go through, both on the macro and the fiscal side, is not going to be over in three years or in five years, it will probably take 10 years until these countries actually get back to health,” Olivier Blanchard said In respect of Europe's struggling peripheral countries, at an economics symposium at the Massachusetts Institute of Technology in Cambridge, Massachusetts, according to Bloomberg News.

The Frenchman is a professor of economics at MIT and the symposium was part of the program celebrating the university's 150th birthday.

In a discussion on the outlook for “peripheral Europe” - -  countries Blanchard identified as “surely Ireland and Greece, and Portugal and Spain being not very far from it," Blanchard said the countries face an initial tough period of fiscal consolidation in an adverse environment.

Fiscal Update

The IMF said in its Fiscal Monitor Update issued yesterday, that the overall pace of deficit reduction in advanced economies in 2011 will be below earlier estimates. On average, fiscal consolidation among the advanced G-20, measured in cyclically adjusted terms, is now projected to equal less than ¼ percent of GDP (gross domestic product) compared to the 1% of GDP projected in November. Their debt ratio is anticipated to rise by almost 5 percentage points, to exceed 107% of GDP.

The IMF warned the fast-growing emerging market economies against increasing spending in the current environment.

"Many emerging economies need to rebuild fiscal buffers more rapidly to address overheating concerns; create scope to respond to any growth slowdown; or avoid relapsing into procyclical policies that would undermine credibility," the Fund said.

In the US on Wednesday, the non-partisan Congressional Budget Office (CBO) projected in respect of 2011 that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5trn, or 9.8% of GDP. The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1% of GDP from 2014 to 2021.

However, the projections are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, the CBO said that they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

The CBO says the deficits of $1.4trn in 2009 and $1.3trn in 2010 are, when measured as a share of GDP, the largest since 1945 - - representing 10.0% and 8.9% of the nation's output, respectively.

"This year, the US deficit, it's budget deficit, is probably going to go up slightly, not go down as was planned previously but of course this is going to produce some faster growth in the US," John Lipsky, first deputy managing director of the IMF, who is an American, said to CNBC in Davos on the US deficit:

On Thursday, Standard & Poor's lowered its credit rating on Japan's public debt to AA- from AA, citing high fiscal deficits.

"The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns - - will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," S&P said.

The IMF's US debt/GDP ratio for 2012 is projected at 102%; Japan's at 233.5% and Italy's at 120% - - Ireland is not separately identified in the update detail.

Last November the IMF projected the gross debt ratio for Ireland at 111.6% in 2012 and the net debt at 81.9%.

Japan's net debt for 2012 was projected at 136% and Italy's at 100%. The net is usually arrived at by offsetting pension fund surpluses.

SEE also Finfacts op-ed article: Dr. Peter Morici: US debt should be downgraded to below Japan's: Japan sound, US insolvent

Carlo Cottarelli, director of the IMF's fiscal affairs department, said on Thursday that "the fiscal accounts of Japan are well known; the fiscal situation is well known to everybody-- that it is clearly in need of an adjustment over the medium term. You know the good news for Japan is that 90 to 95% of its public debt is held domestically which is strength but it is not something that would avoid a fiscal adjustment in the long run.

I think that what is particularly important is that reform is being currently discussed in Japan. I think it is good because tax reform and action also on the revenue side is going to be very important. In particular, the VAT rate in Japan remains quite low and there is definitely room to raise it to reduce the deficit over the medium term.

On the United States, I think that our view is that some targeted stimulus measures were important and were necessary given cyclical developments but the fiscal stimulus package is fairly large. Also its composition is such that the impact on the economy is going to be relatively modest compared to the overall size of the stimulus package as I believe was noted in the presentation of the World Economic Outlook a couple of days ago. This again underscores the fact that there is as I was saying earlier an even more urgent need to make more specific plans to reduce deficits and public deficit, that's not only reducing the deficit, but also the need to lower the level of public debt in the United States over the medium term."

American-born Greek prime minister George Papandreou joined CNBC in Davos to speak about the country's sovereign debt crisis. "What has been discussed is not restructuring, but lengthening of the EU/IMF loan," he said, adding he thought the market would welcome this:

At a Washington DC press conference, Cottarelli was asked what the Fund's position is on Ireland assuming a significant amount of debt related to the banking collapse.

He said here is "a risk of stabilizing the debt-to-GDP ratio at very high levels. I think that it is a concrete risk given how difficult it would be to bring down public debt. I think it should be avoided. This outcome should be avoided because we have pretty clear evidence that countries with high public debt are countries that grow less than other countries. We have seen in the last two decades Italy and Japan characterized by high public debt and low growth rates but there is more systematic evidence that this is a common feature."

In relation to the banking debt issue, Cottarelli said: "I think that on a case-by-case basis one would have to see to what extent private-sector debt should be taken over by the public sector. What I have myself argued is that so far the level of debt that has been taken over by European countries is something that can be managed. Of course it is going to take time to bring down the debt-to-GDP ratio but it is something that over time can be lowered significantly through those fiscal policies, increasing revenues and reducing spending."

In the November Fiscal Monitor, the IMF said overall, the distribution of debt ratios among advanced economies has shifted dramatically since 2007, with 40% of countries now projected to have debt ratios above 80% of GDP by end-2011, compared to 17% pre-crisis.