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Deeply indebted advanced economies urgently need to establish deficit-cutting plans before markets turn on them, the IMF warned today, singling out Japan and the United States among the laggards.
In an updated analysis on global debt and deficits, the IMF said the pace of deficit reduction in advanced economies with large debt was set to slow this year, mainly because of delayed fiscal adjustments in the United States and Japan.
Its warnings came as rating agency Standard & Poor's cut Japan's long-term sovereign debt rating for the first time since 2002, saying Tokyo lacked a plan to deal with its debt load.
"In advanced economies where fiscal sustainability has not been a market concern, credible plans going well beyond 2011 need to be put in place urgently to lock in benevolent market sentiment," the IMF said in its "Fiscal Monitor" report.
"Renewed market pressures in some advanced economies demand that these countries underline their commitment to their deficit targets and devise contingency plans to ensure that adjustment goals are met," the IMF added.
The deepest global recession since the Great Depression forced rich countries to dig deep into their pockets to support their economies, pushing debt loads to record levels in some countries.
Some European nations have been forced to pay high interest rates on their debt for not keeping a better control on their finances, forcing governments to launch budget austerity plans. The IMF said earlier this week that Europe's debt crisis posed one of the gravest risks facing the global recovery.
In its latest report, the fund said large European countries will all tighten their budgets this year broadly in line with earlier plans, with Spain's cuts the largest. But it said Europe needed a more comprehensive approach to crisis management to avoid spillovers and to "break the fiscal-financial spiral".
In a warning to emerging markets, the IMF said fiscal balances in Brazil, China and India were weaker than the IMF projected in November, noting the deterioration in Brazil's fiscal accounts was "particularly pronounced."
The IMF warned the surge in private investment flows and easy credit conditions could discourage emerging markets from building up sufficient fiscal buffers.
"Many emerging economies need to rebuild fiscal buffers more rapidly to address overheating concerns; create scope to respond to any growth slowdown; or avoid relapsing into pro-cyclical policies that would undermine credibility," the IMF said.
The IMF said new data showed that advanced economies were making progress last year in cutting their debt loads. Deficits of rich countries declined to 8 percent of gross domestic product in 2010, a slight improvement over earlier IMF projections, the fund said.
It said good revenue performance and lower spending in Germany and the United States helped lower deficits last year. Euro-area countries that had targeted large fiscal consolidations generally succeeded in posting marked deficit reductions, it added.
In the United States, a tax-cut package put in place in December postponed further movement toward deficit reduction, and the fund said Washington would need to make up for the delay by cutting more deeply in 2012.
The IMF said targeted measures in the package to bolster the weak U.S. labour and housing markets were "justifiable," but an extension of tax cuts for wealthy Americans meant the plan's stimulative effect would be small.
The IMF projected large rollover needs for public and private sector debt in 2011. "Pressures will be especially high during the first half of the year, with euro-area countries competing with about $5 trillion in sovereign rollover needs in other advanced economies," it said.
"This will be compounded by large funding requirements from financial groups in many countries," it added.