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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.
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.
