by Don Alexander, MBA
Associate, RSD Solutions Inc.
(Fiscal Monitor – Staying the Course on Fiscal Adjustment, IMF, June 2011) The IMF noted in its latest interim Fiscal Monitor that government actions to address budget deficits continue to make progress in the advanced economies – especially in core Europe, Australia and Canada. This improvement is driven by recovering activity and higher revenues.
Despite the good news, there remains some doubt about debt sustainability and the political will to maintain austerity programs in countries like Greece. Credit default spreads (CDS) are at new highs for Greece as investors worry about contagion.
Elsewhere, the US and Japan are slow to implement plans to control budget deficits and rising debt levels. However, the US deficit for 2011 will be lower than earlier forecasts and similar to 2010 on a cyclically adjusted basis. Policymakers urgently need to reach a consensus medium-term adjustment plan to avoid potential market distress. Japan lacks a specific plan to address rising debt and contingent liabilities of an aging population. There is a rising risk perception in peripheral Europe led by Greece, Ireland and Portugal followed by some concern about Spain. Downward revisions for growth in Greece and Portugal have created more urgency. This underscores urgency for these countries to implement an adjustment program and develop a comprehensive and consistent approach for crisis management and adherence to Eurozone policies. The record for emerging economies remains mixed as a number of countries are implementing fiscal consolidation at an appropriate pace. In others, fiscal policy must be tightened quicker to avoid the potential risk of overheating. Long-term, countries must implement policies to reduce imbalances and government market intervention.
The improvement in the outlook for government finances in a number of countries is overshadowed by recent events. The surge in the CDS premiums for Greece raises a few questions – is the CDS exposure held by a few institutions or widely dispersed? Can the institutions payout the billions required in a default? Do we have concentrated risk such as AIG? This is something that policymakers or regulators cannot answer.
