Credible debt reduction plans essential: IMF's Lagarde

WASHINGTON Mon May 7, 2012 2:47pm EDT

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WASHINGTON (Reuters) - The world's advanced economies must take steps to cut their huge public debt, but the right mix of policies will vary by country, International Monetary Fund Managing Director Christine Lagarde said on Monday.

"The most important element is to lay out a credible medium-term plan to lower debt," Lagarde said in the prepared text of a speech delivered in Zurich. "Without such a plan, countries will be forced to make an even bigger adjustment soon."

The former French finance minister also said countries should keep a "steady hand on the wheel" by sticking to announced fiscal measures, even if growth is weaker than expected and causes an unexpected drop in tax revenues or an increase in spending.

She spoke one day after Francois Hollande, a Socialist running on an anti-austerity message, defeated center-right incumbent Nicolas Sarkozy in the French presidential election.

The vote, combined with Greek voters' rejection of parties that slashed budgets to get a European Union/IMF bailout, undermined investor confidence in the euro zone's ability to cut spending.

Lagarde acknowledged "austerity versus growth is very much the debate of the hour."

But she called it a "false debate" because it is possible for countries to design strategies that are both good for stability and growth, Lagarde said.

"We know that fiscal austerity holds back growth and the effects are worse in downturns. So the right pace is essential - and the right pace will be country specific. The right mix between cutting spending and raising revenue is also critical," Lagarde said.

"As next year looms on the horizon, countries need to keep a steady hand on the wheel. If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets," she said.

"In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens," Lagarde said.

(Reporting By Doug Palmer, Editing by Chizu Nomiyama and M.D. Golan)

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