IMF Issues Fresh Debt Warning To US And Japan

The International Monetary Fund is warning the United States and Japan to learn this lesson from Europe: not to take it for granted that financial markets will allow them to continue paying very low interest rates on their
very high--and rising--public debt.

"The speed and severity with which financial pressures spread in the euro area should serve as a cautionary tale to Japan and the United States," the global lender said in its fiscal monitor report published Tuesday at the start of the IMF's fall meetings.

Since the IMF told the world's two largest advanced economies at the April spring meetings that more was needed to cut their debt ratios, the U.S. suffered from a bruising budget debate over the summer, highlighting the challenges the nation faces in containing a debt level that's now close to the amount the whole economy produces in a year. For its part, Japan continues to be burdened by the highest public debt ratio in the advanced world, estimated at 220% of gross domestic product by the IMF.

Even so, both countries benefit from large stores of goodwill from investors, allowing the U.S. to borrow over the next 10 years at around 2.0% and Japan to borrow at just 1.0%. The IMF lists several reasons why this is the case, including a substantial share of debt held domestically and strong demand for their bonds from a stable investor base of insurance companies and pension funds.

However, these favorable conditions could shift if needed steps to slash the budget gaps are not taken, the IMF warns. The Washington-based lender estimates the U.S. and Japan will continue to have the largest annual budget deficits in the advanced world this year, around 10% of GDP.

Current and projected deficit and debt levels in the U.S. and Japan are "at least as high" as for the euro area, the IMF said. Both countries face the largest financing requirements among all advanced economies over the next three years, reflecting a larger share of short-term debt compared to Europe. Problems in the U.S. are compounded by an expected high level of long-term health care and pension expenses.

"Low borrowing costs in Japan and the United States have arguably created a false sense of security," the IMF said, adding the favorable conditions should instead be viewed as "providing a window of opportunity for policies to address fiscal vulnerabilities."

U.S. government debt shot up to 94% of GDP last year from only 58% in 2000. The increase has been particularly sharp in recent years, when President Barack Obama boosted spending to fight the financial crisis of 2008 and 2009. Growth has been disappointingly slow since the recovery began around mid-2009 and there are now fears of a new recession.

The U.S. faces an uphill task in keeping its debt under control because Republicans in Congress oppose Obama's plan to mix spending cuts and tax increases to slash the country's huge budget deficit. Obama on Monday offered a plan to reduce the nation's deficit by $3.6 trillion over a decade, almost half of which would come from tax increases, including a new tax on millionaires. Congress is unlikely to pass the full package given Republican resistance to tax increases.