IMF urges swift lifting of US debt limit

WASHINGTON: The International Monetary Fund on Monday warned the United States that it faces a "severe shock" if the country's debt ceiling is not lifted soon.

But, with US politicians battling over a plan to slash the deficit, the IMF executive board called on authorities to only gradually reduce spending, to avert "a disruptive loss in fiscal credibility."

"The federal debt ceiling should be raised expeditiously to avoid a severe shock to the US economy and world financial markets," IMF economists said in a report on the US economy.

Democratic and Republican lawmakers were in negotiations Monday trying to break a prolonged deadlock over raising the government's $14.3 trillion borrowing cap, linked to a long-term plan to reduce a swollen budget deficit.

The debt limit was reached in mid-May and the US Treasury warns that it may be unable to pay its obligations by August 2.

In an annual review of the world's biggest economy, the IMF economists criticized deficit-reduction plans proposed by the Obama administration and the Republican majority in the House of Representatives, citing a tepid economic recovery.

"The official deficit reduction proposals could be too front-loaded given the cyclical weakness and, at the same time, insufficient to stabilize the debt by mid-decade."

The IMF projected public debt at 99.0 percent of gross domestic product this year, rising to a ratio of 103.0 percent in 2012, higher than its June estimates.

"A politically-backed medium-term framework that raises revenues and addresses long-term expenditure pressures should be the cornerstone of fiscal stabilization," it said.

"The strategy should include entitlement reforms, including additional savings in health care, as well as revenue increases, including by reducing tax expenditures," the Washington-based institution said in a separate statement on the executive board's discussions of the review.

Executive directors called for the US to gradually unwind the extraordinary support provided the economy to deal with the 2008-2009 financial and economic crisis.

"Spillovers from credible and gradual fiscal consolidation are limited," it said, while those from a loss of confidence in US debt sustainability "are universally large and negative."

Copyright AFP (Agence France-Presse), 2011