IMF warns of soaring debt in major economies

Published by rudy Date posted on August 1, 2009

WASHINGTON (AFP) – The International Monetary Fund warned Thursday that rising public debt of the major developed countries could undermine efforts to spur economic recovery.

The growing debt levels could undermine investor confidence and push up interest rates, and eventually reverse economic gains, according to an IMF report.

“With a delayed withdrawal investor concerns about sustainability may increase, leading to higher interest rates on government paper, undermining the recovery and increasing risks of a snowballing of debt,” the Washington-based institution said.

The IMF said public debt would represent around 120% of gross domestic product (GDP) by 2014 in the 9 advanced economies of the Group of 20.

That would represent a whopping 40 percentage point increase since the start of the global financial and economic crisis in 2007.

The report highlighted growing debts in the Group of Seven countries — Britain, Canada, France, Germany, Italy, Japan and the United States — and Australia and South Korea, two other major economies in the G20.

The IMF called on the advanced countries to do more to reduce their budget deficits in the medium term.

“Although fiscal balances are expected to improve over the next few years as the global economy recovers, the outlook for the public debt in many countries is more worrying,” the 186-nation institution said.

The average debt-to-GDP ratio of the G20 developed and developing countires, which stood at 62.4% at pre-crisis levels in 2007, rose to 82.1% in 2009 and was expected to hit 86.6% in 2014.

The average ratio for the developed countries would rise from 78.6% in 2007 and exceed output at 100.6% this year. By 2014, it was projected at 119.7%.

“While fiscal policy should continue to support activity until recovery has taken hold, clear strategies are needed to consolidate fiscal balances in the medium term as conditions improve and ensure that solvency is preserved,” the IMF said.

The IMF, which had urged member nations to adopt stimulus measures to fight the severe economic downturn, has called on them in recent months to formulate exit strategies once recovery takes hold.

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