IMF: Give Greece, Spain more time

The IMF yesterday backed giving Greece and Spain more time to reduce their budget deficits, cautioning that cutting too far, too fast would do more harm than good.

But Germany said back-tracking on debt-reduction goals would only hurt confidence, a stance that suggested some disagreement between the International Monetary Fund and Europe’s largest creditor country.

“The IMF has time and again said that high public debt poses a problem,” German finance minister Wolfgang Schaeuble said. “So when there is a certain medium-term goal, it doesn’t build confidence when one starts by going in a different direction.”

“When you want to climb a big mountain and you start climbing down, then the mountain will get even higher.”

The IMF released new research this week showing that fiscal consolidation has a much sharper negative effect on growth than previously thought. Since the global financial crisis, these so-called fiscal multipliers have been as much as three times larger than they were before 2009, the research shows.

That means aggressive austerity measures may inflict deep economic wounds that make it harder for an economy to get out from under heavy debt burdens.

“It is sometimes better to have a bit more time,” IMF managing director Christine Lagarde said.

“That is what we advocated for Portugal; this is what we advocated for Spain; and this is what we are advocating for Greece.”

But the IMF was less willing to be patient with Europe on following through with its efforts to seek a more cohesive fiscal and banking union. It said that process was critically incomplete, and blamed the plodding pace for contributing to economic uncertainty that was hurting global growth.

“Europe has to get its act together,” said Palaniappan Chidambaram, India’s finance minister, speaking on behalf of the Group of 24 developing and emerging economies. “What is happening in Europe is having an impact on developing countries.”

The IMF has warned that a recent respite in borrowing costs for countries such as Spain may prove short-lived unless eurozone leaders come up with a comprehensive and credible plan.

In its financial stability report on Wednesday, the IMF said without swift policy action, including the triggering of the ECB’s bond-buying programme, the premium that investors demand to hold Spanish and Italian debt instead of safer German bonds would nearly double.

Standard & Poor’s cut its rating on Spain on Wednesday to a level just above junk territory, and Moody’s may soon follow.

Jose Vinals, head of the IMF’s monetary and capital markets department, warned countries must not withhold help if Spain asked the ECB to buy its bonds under the Outright Monetary Transaction (OMT) bailout scheme.

“If it were to be the case that they decide to activate this mechanism and they can submit to the proper degree of conditionality, it would be essential that the creditor countries do not negate this activation of the OMT for Spain or for any of the countries.”

European officials were keen to ensure their region was not the sole topic of discussion in Tokyo, where finance officials from around the globe have gathered for the annual meeting of the IMF and World Bank. Europe wants more attention placed on the difficulties Washington faces addressing its “fiscal cliff” of automatic spending cuts and tax increases that will take effect early next year unless the US Congress acts.

US treasury secretary Timothy Geithner said the magnitude of fiscal reforms that the US needed to achieve debt sustainability was between 2% and 3% of gross domestic product, which he said was “a modest challenge relative to what most countries around the world face on the fiscal side.”

— Reuters