IMF sees imbalances as threat to economy Monday June 20, 4:31 pm ET By Janet Guttsman
OTTAWA (Reuters) - Highlighting imbalances as a threat that could destabilize the world economy, the International Monetary Fund urged the United States on Monday to cut its budget deficit more aggressively than planned and said China should slowly allow its currency to float.
In a speech to the National Press Club in Ottawa, and then in comments to reporters, IMF Managing Director Rodrigo Rato said the United States needed bolder efforts to cut its budget deficit before baby boomers retire.
He said the capital movements needed to sustain a widening U.S. current account deficit could not be sustained long-term, and warned that investors might one day lose their appetite for U.S. assets.
"When we speak of global imbalances, we often are referring to the large current account deficit in the United States, and the matching surpluses in other countries," Rato said in his prepared remarks.
"Unless action is taken ... to facilitate an orderly resolution of these imbalances, we run the risk of investors drastically reducing the flow of capital into the United States. In that event, the dollar could depreciate rapidly, currency and capital markets could become disorderly, and interest rates could rise sharply, posing serious threat to global economic stability."
Rato said there was no sign at present that capital flows to the United States were ebbing, but that could change if markets took a "more negative" approach.
He noted that the United States had promised action to halve its budget deficit over five years from 2006, and said these proposals needed "firm implementation."
"Even bolder deficit reduction would be desirable and warranted, especially in view of the cyclical strength of the U.S. economy, and the importance of lowering government debt ahead of the retirement of the baby boom generation," he said.
Rato said Europe and Japan need to step up efforts to make their labor markets more flexible and China, both in its own interest and in the interests of other countries, should adopt a more flexible exchange rate.
But Rato said there was no need for China to make its currency convertible in a single step, and the IMF was advising China to keep some controls on capital flows in place after it eases ties between the yuan and the U.S. dollar.
"China does not need to (have) immediate total flexibility, and China could perfectly live with some capital controls as a guarantee that the country would be able to handle some speculative money or short-term money," he said.
The IMF, along with several major industrialized countries, argue that the fixed yuan exacerbates world economic imbalances because it makes Chinese exports artificially cheap.
The Chinese say they are preparing the ground to change the system, but they have given no timetable.
Rato also said that Argentina, one of the IMF's biggest borrowers, needed to trim its budget and boost its savings rate to cut debt levels and put its economy on a sound footing.
But it would be up to the Argentine government to decide if it wanted to apply for a new IMF loan, and to accept the budgetary and economic conditions that would accompany a new lending program from the global lender.
"It will be up to the government to request a program from the IMF. If that is proposed to us, we will work with the Argentine government to establish a framework of budgetary and structural reform," Rato said.
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