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IMF warns US, eurozone deficits a threat to stability

The International Monetary Fund warned that Washington and debt-ridden European countries are “playing with fire” unless they take drastic steps to reduce their budget deficits.

The warning came as the IMF cut its growth forecast for the US and said the risks facing the global economy have increased since April.

It said the euro area’s worsening crisis, signs of economic weakening in the US and overheating in the developing world all pose fresh threats to global stability.

“The global economy has turned the corner from the Great Recession. However, securing the transition from recovery to expansion will require a concerted effort at addressing diverse challenges,” the IMF said in its World Economic Outlook update.

World growth this year is expected to be 4.3pc, a downgrade from 4.4pc in April, prompted predominantly by a sharp reduction in America. US GDP is now forecast to grow at 2.5pc this year and 2.7pc in 2012, compared with its prediction in April of 2.8pc and 2.9pc respectively.

“For the US, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform,” it said.

Jose Vinals, director of the IMF’s monetary and capital markets department, added: “If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States.

“You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire.”

The IMF had already downgraded its forecasts for UK growth to 1.5pc from 1.7pc in April, which was itself a downgrade from 2pc in November.

It added: “Downside risks due to heightened potential for spillovers from further deterioration in market confidence in the euro area periphery have risen since April. Market concerns about possible setbacks to the US recovery have also surfaced.

If these risks materialize, they will reverberate across the rest of the world–possibly seriously impairing funding conditions for banks and corporations in advanced economies and undercutting capital flows to emerging economies.”