RISING CONCERNS over sovereign debt are reducing policy-makers’ freedom of manoeuvre and threaten to short-circuit the global economic recovery, the IMF has warned.
In its regular assessment of the global economy, released yesterday in Washington, the IMF revised up its growth forecast for this year on the back of a stronger-than-expected recovery in the US, but left the overall projection for next year largely unchanged.
It still expects economic contraction in the Republic, however, pencilling in growth for 2011 at the earliest, and warning that efforts must be made to cut the Irish deficit.
“The global recovery has evolved better than expected, but in many economies the strength of the rebound has been moderate given the severity of the recession,” the IMF said.
“Economies that are off to a strong start are likely to remain in the lead, as growth in others is held back by lasting damage to financial sectors and household balance sheets.”
The fund projected global growth of 4.2 per cent this year, 0.3 percentage points higher than its most recent forecast in January, and 4.3 per cent next year, unchanged from January’s estimate.
For the Republic, the IMF predicted a contraction of 1.5 per cent this year, followed by growth of 1.9 per cent in 2011. It expects growth of 2.5 per cent in 2015.
It said it was “paramount” for deficits in Ireland, Greece, Portugal and Spain to be reversed so that confidence could be restored.
The IMF said while financial markets were recovering from the crisis and capital was flowing back to emerging markets, the emergence of sovereign debt problems would constrain governments’ ability to respond to economic weakness with more fiscal stimulus. “In the near term, the main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown and contagious sovereign debt crisis.”
Separately, the IMF’s bank tax proposal received a cool response from many quarters yesterday as countries that did not have to bail out many of their banks in the crisis said they were being punished for others’ offences.
The IMF is recommending a special bank tax in G20 nations that would help pay for future bailouts.
Canada, one of the staunchest opponents of the tax, pointed to the stability of its own banks in the crisis, and said a tax could increase instability by reducing banks’ capital.
Australia and India are also cool on the idea. – (Copyright The Financial Times Limited 2010)
