* U.S. and Japan must spell out budget-cutting plans now
* Fickle markets could turn; Europe's cuts on track
* U.S. postpones tightening in favor of tax cuts
(Adds details from news conference)
By Lesley Wroughton
WASHINGTON, Jan 27 The United States and Japan
urgently need to spell out plans for cutting their budget
deficits before financial markets turn on them and force
borrowing costs higher, the IMF warned on Thursday.
The stark warning came as rating agency Standard & Poor's
cut Japan's long-term sovereign debt rating for the first time
since 2002, and a day after a U.S. agency raised its 2011
budget deficit forecast by 40 percent. [ID:nL3E7CR0Q5]
In a report on global debt and deficits, the International
Monetary Fund expressed concern that budget cutting in advanced
economies with large debts was set to slow, and it pointed to
the United States and Japan as laggards.
"In advanced economies where fiscal sustainability has not
been a market concern, credible plans going well beyond 2011
need to be put in place urgently to lock in benevolent market
sentiment," the IMF said in its "Fiscal Monitor" report.
"Renewed market pressures in some advanced economies demand
that these countries underline their commitment to their
deficit targets and devise contingency plans to ensure that
adjustment goals are met," the IMF added.
The deepest global recession since the Great Depression
forced rich countries to dig deep into their pockets to support
their economies, pushing debt to record levels in some
Some European nations have been forced to pay high interest
rates on their debt for not keeping a better control on their
finances, forcing governments to launch budget austerity plans.
The IMF said earlier this week that Europe's debt crisis posed
one of the gravest risks facing the global recovery.
In its latest report, the fund said large European
countries will all tighten their budgets this year broadly in
line with earlier plans, with Spain's cuts the largest.
But it said Europe needed a more comprehensive approach to
crisis management to avoid spillovers and to "break the
IMF Fiscal Affairs Department Director Carlo Cottarelli
told reporters that markets at the moment were overestimating
the risk of default or debt restructuring in Europe.
The IMF said new data showed advanced economies were making
progress last year in cutting their debt loads. Deficits of
rich countries declined to 8 percent of gross domestic product
in 2010, a slight improvement over earlier IMF projections, the
However, new tax cuts in the United States and increased
spending in Japan has delayed further progress.
Cottarelli said Japan needed to raise more revenue and he
renewed a call for an increase in the value added tax.
As for the United States, the fund said Washington would
need to make up for the delay by cutting more deeply in 2012. A
deeper adjustment by the United States is needed for it to meet
an ambitious G20 target of halving its budget deficit by 2013.
Cottarelli welcomed President Barack Obama's announcement
this week of a five-year freeze in annual domestic spending.
The White House estimates the freeze would cut the U.S. budget
deficit by more than $400 billion over the next decade.
But Cottarelli stressed that Washington must be more
specific about its plans to cut its budget deficit and lower
public debt levels over the medium term. The Congressional
Budget Office said on Wednesday the U.S. budget gap would widen
to a record $1.48 trillion this fiscal year.
Asked about the IMF report, a White House official said
Obama would lay out "a number of tough steps to tackle our
fiscal situation" in a budget proposal next month. At the same
time, top White House economist Austan Goolsbee said the
government had to be careful not to undermine a fragile
economic recovery. [ID:nWEN6389]
Pressed by a reporter on whether the United States was
using the dollar's status as the world's reserve currency to
avoid tough spending decisions, Cottarelli would only say
fiscal consolidation was important to maintain U.S.
The United States holds a coveted top triple-A credit
rating from all three rating agencies, although Moody's warned
last month a the swelling deficit would move it a step closer
to a downgrade in the coming two years.
EMERGING MARKET WARNING
In a warning to emerging markets, the IMF said fiscal
balances in Brazil, China and India were weaker than the IMF
projected in November, noting a deterioration in Brazil's
fiscal accounts was "particularly pronounced."
"For Brazil I don't think there is any immediate risk,"
Cottarelli said, but there is a concern amid increased capital
inflows and easy credit conditions in emerging economies that
governments were spending the increased revenues.
"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
pro-cyclical policies that would undermine credibility," the
(Additional reporting by Mark Felsenthal; Editing by Neil