IMF warns US to make a ‘down payment’ on deficit

The US should make a ‘down payment’ this year on tackling its budget deficit, the International Monetary Fund has warned, as it emerged that the world’s biggest bond investor is shorting the country’s bonds.

Richard Blackden
Telegraph [UK]
13 Apr 2011

America will rack up a budget deficit of 10.8pc of gross domestic product this year, the largest of any of the developed economies, the IMF said in its latest Fiscal Monitor report.

In sharp contrast to Britain and much of the rest of Europe, the US has so far delayed any move to cut its budget deficit. Instead, through a combination of extending tax cuts and a second, $600bn round of quantitative easing, Congress and The White House have focused efforts on trying to quicken a recovery that failed to take off last year.

Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co (Pimco), said it was the failure of politicians in Washington DC to take the country’s deficit – estimated to reach about $1.5 trillion next financial year – seriously that has prompted him to start positioning the $236bn Total Return Fund to benefit from a drop in US government bond. In February, the fund sold its US governments bonds, or Treasuries.

“Without attacking entitlements – Medicare, Medicaid and Social Security – we are smelling $1 trillion deficits as far the nose can sniff,” Mr Gross said in the firm’s monthly outlook.

President Barack Obama, who is facing increasingly loud calls from Republican opponents to reduce the deficit, is expected to lay out measures on Wednesday.

“Market concerns about sustainability remain subdued in the US, but a further delay of action could prove costly,” the IMF said. The US should move “sooner rather than later”,” Carolo Cottarelli, the director of the IMF’s fiscal division said in Washington DC on Tuesday.

Related: Financial Times, US lacks credibility on debt, says IMF

The US lacks a “credible strategy” to stabilise its mounting public debt posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.

In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011 at a time when its economy was growing fast enough to reduce borrowing.

To meet the 2010 pledge by the Group of 20 countries for all advanced economies — except Japan — to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960, the IMF said. In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.

Carlo Cottarelli, head of fiscal affairs at the Fund, said: “It is a risk that if it materialises would have very important consequences . . . for the rest of the world. So it is important that the US undertakes fiscal adjustment in a way sooner rather than later.”

The article continues at the Financial Times (subscription required)

From Weasel Zippers, Rep. Paul Ryan Reacts to Obama’s Demagoguery

Also at Weasel Zippers, Obama: My Vision is an America ‘Where We Live Within Our Means’… and Obama Pimping Class Warfare Again: Rich ‘Can Afford to Give Back a Little Bit More’ Because They’ve ‘Benefited Most From Our Way of Life’…

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