Sunday, April 17, 2011

IMF Warns United States on its Debt

Bloomberg: U.S. Deficit to Rise to Largest among Major Economies, IMF Says
BBC: US Must Tackle Government Deficit, Says IMF Report
FT: US Lacks Credibility on Debt, Says IMF

As the United States struggles to resolve its financial woes, the International Monetary Fund (IMF) has emerged as yet another critic to chide the country on its precarious financial situation. In the most recent edition of its Fiscal Monitor publication, the IMF warned that the U.S. should address its deficit problem sooner rather than later in order to avoid an insurmountable debt burden.

Addressing the U.S. debt problem has been a contentious topic, with American lawmakers and President Obama unable to come to a consensus on how to reduce the government deficit. Currently, government revenues are able to pay only about 90% of government expenditures, with the remaining 10% being funded through debt. According to the IMF, besides Japan, the U.S. the only advanced economy in the world projected to have increasing debt going into the year 2016.

With the IMF’s warning, the U.S. now joins the ranks of countries such as Greece and Portugal as ones that have been specifically warned about the risks associated with their fiscal position. While it is unlikely that the United States will require a bailout, the country is nevertheless facing a debt burden of historic proportions. According to the IMF, the total amount of accumulated U.S. debt is projected to surpass 100% of the U.S. gross domestic product (GDP) for the first time since the years immediately following World War II. GDP measures the total value of goods and services produced in a country. According to the IMF, the value of the United States GDP in 2010 was approximately $14.6 trillion.

With U.S. debt so high, the IMF is concerned that, if it goes any higher, holders of U.S. debt will lose confidence in the ability of the U.S. to repay its debt obligation. If that occurs, U.S. debt purchasers could demand higher interest rates to compensate for the higher level of perceived risk, which would make it more costly for the U.S. to repay its debt. In a worst-case scenario, these increased costs could cause the U.S. to default on its debt.

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