IMF Tells U.S. to Fix Debt ASAP

NEW YORK ( TheStreet) -- The International Monetary Fund said that the United States must increase its efforts to slash the budget deficit in order to promote stable economic growth and recovery both nationally and globally.

"There is a lot of pressure on the U.S. fiscal account," Carlo Cottarelli, head of the IMF Fiscal Affairs Department, said in a press conference. "But the U.S. has a stronger growth rate than Europe, there is less uncertainty about the financial sector and the U.S. has fiscal credibility."

In its most recent edition of the World Economic Outlook, published in April 2011, the IMF singled out the U.S. and Japan as the two advanced countries that have put their fiscal consolidation efforts on hold in 2011.

However, the IMF is worried that waiting to mend public finances could make refinancing debt more difficult in the future.

"It is important the United States undertakes fiscal adjustment sooner rather than later," Cottarelli said.

The IMF said that the sluggish pace of the U.S. economic recovery calls for "supportive macroeconomic policies." It suggests that the U.S. Federal Reserve keep easy-money policies in place while the government comes to grip with its debts.

"The right policy mix for the United States is one of continued monetary accommodation alongside moves to put fiscal balances on a sounder footing," the IMF said in its report. "A credible strategy to stabilize public debt in the medium term, and a down payment on fiscal consolidation in 2011, are urgently needed."

It forecasts that the global economy will expand about 4.4% by the end of the year, a slightly slower growth rate than 5% in 2010.

IMF economist Olivier Blanchard noted that while the global economic recovery continues to progress, the revitalization remains unbalanced.

"Symmetrically, emerging-market economies must rely less on external demand and more on domestic demand," Blanchard said. "The need for careful design at the national level and coordination at the global level may be as important today as at the peak of the crisis two years ago."

The issue regarding how to handle the U.S. debt almost led to a government shutdown last weekend when Republican and Democratic lawmakers were deadlocked over budget cuts.

House Republicans and the White House reached an agreement late Friday on nearly $39 billion in budget cuts for the fiscal year.

IMF officials said that any further delay in slashing the deficit could potentially cause the bond market to lose confidence in the U.S.' ability to cut its deficit, resulting in higher interest rates and an unstable global economy.

"As activity continues to pick up, large sovereign funding requirements will put upward pressure on interest rates, slowing the recovery of the private sector and lowering potential output," the IMF states in its report. "This could cause abrupt increases in interest rates in the United States (from especially low levels) that could destabilize global bond markets, with particularly deleterious effects on emerging market economies."

President Barack Obama is expected to lay out his plan to reduce the nation's deficit on Wednesday.

--Written by Theresa McCabe in Boston.

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