IMF fiscal chief: Europe debt situation improving faster than U.S.’s


The debt situation across the Atlantic is improving at a faster pace than in the U.S., even though the main fiscal risks to the global economy are currently centered in Europe, the International Monetary Fund‘s fiscal chief said Tuesday.

Carlo Cottarelli, head of the IMF’s fiscal affairs department, urged the U.S. to move soon in agreeing to a plan to contain the country’s public debt, which in 2010 rose to more than 90% of gross domestic product, or the economy’s total output.

In an interview, he stressed the U.S. must implement budget cuts before interest rates begin to rise as markets start to doubt the country’s ability to cut its debt.

“If I look at fiscal fundamentals, I see the situation in Europe improving faster than in the U.S.,” he said, adding that Portugal should be the last euro-zone country to need a bailout from the European Union and the IMF.

“Spain should be out of the woods from the point of view of attacks from markets,” Cottarelli said. The country has adopted a needed pension reform and is taking care of its bank problems, he added.

Portugal this month became the third euro-zone country after Ireland and Greece to be forced to ask for a bailout from the EU and the IMF. The market’s focus has since turned to Spain due to concerns about its banks since a burst property bubble.

Financial market worries have forced countries in Europe to fix their public finances, a pressure the U.S. hasn’t felt yet. But some economists fear the U.S. could be next in line.

In its Fiscal Monitor Report, a review of global fiscal issues published Tuesday, the IMF expressed concerns that a delay in slashing the deficit might cause the bond market to lose faith in the U.S.’s ability to do so, which would push interest rates higher and possibly destabilize the global economy.

Cottarelli said the risk of a fiscal crisis in the U.S. was low because the country’s banks seem to be in a better position than in most European countries and the U.S. has a better economic growth track record, which helps to reduce the debt. But he signaled concern because the U.S. economy’s growth potential may be lower following the deep recession of 2008-2009.

The probability [of a U.S. fiscal crisis] is low but if it happens the costs are huge not only for the U.S. — but also for the rest of the world,” the IMF official said.

The IMF expects the U.S. to post the biggest budget deficit among advanced economies this year, equal to almost 11% of gross domestic product. By contrast, the euro-zone budget deficit is seen falling to 4.4% of GDP from 6.0% of GDP in 2010.

The IMF considers the December stimulus package, which includes a payroll tax cut and an extension to unemployment benefits, to be a small benefit to growth while presenting big fiscal costs.

The past week has seen a flurry of activity in Washington on fiscal issues. A last-minute deal between Republicans and Democrats on Friday averted a government shutdown, but the two sides must now agree to raise the debt ceiling so the U.S. can continue to borrow on markets without defaulting on its debt. White House officials Tuesday opened the door to a deal with Republicans. President Barack Obama is due to lay out his plan to reduce the deficit Wednesday.

A deal to keep the U.S. government funded for the remainder of fiscal 2011, unveiled Tuesday, contains large budget cuts for high-speed rail projects and the Environmental Protection Agency and leaves almost no program immune from what would be the largest spending reductions in the country’s history. (Source: