IMF warns high public debt "tremendous" challenge

CAMBRIDGE, England Sat Apr 10, 2010 10:30am EDT

International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn speaks during a debate of the European Parliament's Committee on Economic and Monetary Affairs with National Parliaments on European and global economic reforms until 2020 taking place at EP in Brussels, March 17, 2010. REUTERS/Sebastien Pirlet

International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn speaks during a debate of the European Parliament's Committee on Economic and Monetary Affairs with National Parliaments on European and global economic reforms until 2020 taking place at EP in Brussels, March 17, 2010.

Credit: Reuters/Sebastien Pirlet

CAMBRIDGE, England (Reuters) - IMF chief Dominique Strauss-Kahn said on Saturday that public debt in the advanced economies is set to increase significantly and reversing the rise would be a "tremendous" challenge.

Strauss-Kahn, managing director of the International Monetary Fund, also said that global economic recovery is still sluggish and uneven and needs continued policy support in many advanced economies.

Growing concerns about the ability of governments to finance the high level of public debt after the financial crisis, particularly in the case of Greece, have been making investors jittery in the past few months.

Strauss-Kahn said public debt in the advanced economies is forecast to rise by about 35 percentage points on average, to about 110 percent of gross domestic product in 2014.

"Reversing this increase will be a tremendous challenge -- let alone reducing debt below pre-crisis levels, which may be needed to leave enough fiscal space to tackle future crises," he told an economic conference at Cambridge University.

"Therefore, for the next decade or two, cyclical upswings should be used to reduce public debt, rather than finance expenditure increases or tax cuts."

Strauss-Kahn's speech was disrupted by protestors, who climbed to the balcony above the screen by where he was standing and threw a banner that read: "IMF is part of the problem, not the solution."

The IMF head said that in Europe, as well as at a global level, policy coordination was important to secure economic growth.

"I recently spoke about this, in the context of Europe, where a broader framework of policy cooperation -- encompassing monetary, fiscal, financial and structural issues -- is needed to bolster economic growth. But something similar is also needed on the global scale, to secure growth that is balanced, and hence sustainable," he said.

Strauss-Kahn mentioned an idea that targeting higher inflation could leave more room to lower interest rates in the face of a deflationary recession, proposed by his colleague at the IMF.

"I think this is an interesting idea that merits serious discussion. But it is not the principal question for monetary policy, and should not distract us from more important concerns."

He also said the global economy now appeared to be on the path to recovery.

"Though it remains sluggish and uneven, and in need of continued policy support in many advanced economies. Moreover, the costs of the crisis -- low growth, high unemployment and sharply higher public debt -- will take many years to overcome," he said.

(Reporting by Natsuko Waki; Editing by Susan Fenton)

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Comments (3)
Story_Burn wrote:
The Greek bond issued less than two weeks ago is trading over two percentage points higher in yield. That’s a much higher interest cost for Greece going forward

Apr 10, 2010 11:10am EDT  --  Report as abuse
wondering wrote:
If, due to IMF, Greek bonds sell in future for 5% does that mean that holders who bought at 7% make a sudden profit of 2%? If that is the case is it moral hazard?

Apr 10, 2010 4:38pm EDT  --  Report as abuse
fred5407 wrote:
Just another warning about public debt. This cannot go on, otherwise we will encounter another crash worse than the last. There are other ways to stimulate the economies that do not incur massive spending. Time to pull back on imports and to manufacture locally again to heal the economy.

Apr 10, 2010 5:29pm EDT  --  Report as abuse
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