Huge public debt the biggest threat to growth, says Lagarde

12 Oct 12
Tackling the biggest global public debt since the Second World War requires fiscal adjustments that don’t damage growth, the managing director of the International Monetary Fund said today.

By Nick Mann | 12 October 2012

Tackling the biggest global public debt since the Second World War requires fiscal adjustments that don’t damage growth, the managing director of the International Monetary Fund said today.

Christine Lagarde told the IMF and World Bank’s annual meeting in Tokyo, Japan, that the global economy had been put ‘in jeopardy’ by the ‘huge legacy’ of public debt, which now averaged 110% of gross domestic product in advanced economies.

‘This leaves governments highly exposed to subtle shifts in confidence,’ she said. ‘It also ties their hands, especially as they seek to build the infrastructure of the twenty-first century while respecting social promises. The needs of rapidly ageing populations will add to these pressures.

‘One lesson is clear from history – reducing public debt is incredibly difficult without growth. High debt, in turn, makes it harder to get growth,’ she added.

Getting beyond the economic crisis and boosting growth required appropriate monetary policy, completion of banking sector reform and structural reforms, Lagarde said.

This involved the ‘right pace’ of fiscal adjustment, being ‘mindful of not undercutting growth but with solid and realistic plans to bring debt down over the medium term’.

But Lagarde warned on banking reform, she feared momentum was being lost ‘both on implementing the agreed reforms and on making more progress in areas like derivatives, shadow banking and too-important-to-fail institutions’.

Individual countries’ actions should be complemented by a rebalancing of global demand towards ‘dynamic’ emerging markets, she added.

Yesterday, Lagarde also indicated her support for countries to be given more time to reduce their deficits rather than introducing heavily frontloaded adjustment programmes.

‘Instead of frontloading heavily, it is sometimes better, given circumstances and the fact that many countries at the same time go through that same set of policies with a view to reducing their deficit, it is sometimes better to have a bit more time.’

This was what the IMF had advocated for Portugal, Spain and Greece, she noted. Earlier this week, the IMF warned that countries’ debt-reduction policies were weighing heavily on the global economy recovery.

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