World finance chiefs chastise U.S. on budget gap

Reuters News
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Posted: Apr 16, 2011 12:59 PM

By Lesley Wroughton

WASHINGTON (Reuters) - World finance leaders on Saturday chastised the United States for not doing enough to shrink its massive budget deficit and warned that fiscal strains in rich nations threaten the global recovery.

Although global tensions over the possibility of currency wars and Europe's growing debt crisis continue to simmer, finance ministers in Washington for semi-annual talks also took sharp aim at the United States' $14 trillion debt.

While most of the criticism came from emerging market economies, some rich nations also joined the chorus.

"The fiscal situation in the advanced economies gives us great concern, and it is in this area that we see the major risks to the global economy," Russian Finance Minister Alexei Kudrin told the International Monetary Fund's advisory panel.

The IMF this week noted that the U.S. budget deficit was on course to hit 10.8 percent of nation's economic output this year, tying Ireland for the highest deficit-to-GDP ratio among advanced economies. It urged Washington to move quickly to put a credible plan in place to tighten its belt.

The Obama administration and the U.S. Congress have engaged in a big battle over how best to reduce the red ink. Republicans have sought to use the need to raise the nation's $14.3 trillion debt limit to avoid a default as a lever to extract deep spending cuts.

The Republican-led House of Representatives on Friday approved a plan to slash spending by nearly $6 trillion over a decade and cut benefits for the elderly and poor.

President Barack Obama, who has offered a competing vision to curb deficits by $4 trillion over 12 years, said on Thursday the Republican plan would create "a nation of potholes."

The White House has been wary about withdrawing fiscal support for the economy too quickly, and Treasury Secretary Timothy Geithner told fellow finance ministers on Saturday caution was needed.

"We are committed to fiscal reforms that will restrain spending and reduce deficits while not threatening the economic recovery," he said.

But even as Geithner said the United States recognizes the need to address its budget deficit, he was quick to say that others whose practices contribute to global imbalances must also change.

"However, others, especially those whose fundamentals call for greater exchange rate flexibility, must also contribute," Geithner said.

The United States has repeatedly called for China to relax its limits on the yuan currency.

Dutch Finance Minister Jan Kees de Jager warned that if the United States and other advanced nations move too slowly it could undermine confidence in the global economy.

"Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues, with repercussions on confidence and the still fragile financial sector," de Jager said. "Debt dynamics in other advanced economies, including the United States, are of concern."

Yi Gang, a deputy governor of China's central bank, called for "more rigorous" efforts by advanced economies to tighten budgets and said the IMF needs to strengthen its monitoring of these rich nations.

Kudrin, in remarks clearly targeted at the U.S. Federal Reserve, said central banks that have purchased government debt to keep interest rates low were abetting fiscal profligacy.

The Fed is on course to complete the purchase of $600 billion in U.S. government debt by the end of June, which would take its total purchases of mortgage-related and government debt since December 2008 to near $2.3 trillion.

Echoing some Fed officials and Republican lawmakers in Washington, Kudrin said those purchases blurred the line between monetary and fiscal policy in a way that could jeopardize a central bank's independence.

"We observe this process with some wonderment, since it amounts to the monetization of those countries' budget deficits," Kudrin said.

(Additional reporting by Glenn Somerville; Writing by Lesley Wroughton and Tim Ahmann; Editing by Leslie Adler)