Sunday, August 28, 2011

US Should Keep Right Balance Between Debt and Recovery: IMF


The United States must strike the right balance between reducing the public debt and sustaining the recovery, the IMF said yesterday. "In the United States, policymakers must strike the right balance between reducing public debt and sustaining the recovery, especially by making a serious dent in long-term unemployment," IMF Managing Director Christine Lagarde said in her speech here. A fair amount has been done to restore the financial sector health, but house price declines continue to weaken household balance sheets, she said. "With falling house prices still holding down consumption and creating economic uncertainty, there is simply no room for half-measures or delay," she added. The US needs to move on two specific fronts, she said. First, the nexus of fiscal consolidation and growth. "At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation-- involving both revenue and expenditure-- create space for policies that support growth and jobs. "Growth is necessary for fiscal credibility, after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?" she said. Halting the downward spiral of foreclosures, falling house prices and deteriorating household spending is the second front. "This could involve more aggressive principal reduction programmes for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low interest rate environment," added said. Earlier this month, rating agency Standard & Poor's has downgraded the sovereign rating of the US fromm AAA to AA+ "We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating. "We have also removed both the short- and long-term ratings from CreditWatch negative," S&P said in a statement. The downgrade, it said, reflects its opinion that the fiscal consolidation plan which Congress and the administration recently agreed to "falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."

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