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IMF world outlook warns of debt in developed world, inflation in emerging markets

U.S. housing starts rose in March, a good sign, but the IMF said developed nations must take steps to ensure continued recovery.
U.S. housing starts rose in March, a good sign, but the IMF said developed nations must take steps to ensure continued recovery. (Rich Pedroncelli/associated Press)

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By Howard Schneider
Thursday, April 22, 2010

The International Monetary Fund released its latest World Economic Outlook on Wednesday, showing renewed growth through much of the world. Although IMF economists say that a "global depression" has been averted -- with the world economy expected to grow 4.2 percent overall in 2010 -- divisions between developed and emerging economies remain stark. An emerging set of challenges, including rising government debt and a still-weak banking system, could throw the recovery off track.

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DEVELOPED WORLD

Government debt

Levels of government debt in the developed world are approaching levels not seen since World War II, and IMF economists see this as one of the chief risks for continued recovery. The fund is calling for a period of "fiscal consolidation" -- spending cuts and tax hikes -- in the United States, Europe and Japan, so that debt levels stabilize soon and begin a period of gradual decline. The risk, the agency says, is that chronically higher interest rates and chronically slower growth will set in as government borrowing undermines private-sector activity. The more acute danger involves a series of Greek-style crises in which governments would find it harder to raise the money needed to operate, risking a broader economic malaise.

Credit and banking

The good news from recent IMF reports is that the amount of money banks will have to write off because of the financial crisis has been lowered by nearly $500 billion, to $2.3 trillion. That makes the banking system look a lot more stable than it did a few months ago. The bad news: About a third of those write-offs remain to be taken. Bank capital levels remain weak in some European nations, while mortgage defaults still pose a threat to U.S. lenders. What's more, the IMF says banks and financial institutions will have to refinance trillions of dollars in short-term debt in coming months, a "debt wall" that could put governments in competition for a strained pool of credit.

Financial reform

The developed countries have yet to agree on measures that would prevent companies from becoming so large and interconnected that their failure would lead to broader economic losses, and IMF officials are worried that the momentum behind reform may fade as the economy improves.


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