The International Monetary Fund said Wednesday that the US debt burden is perilously unsustainable but warned against too-sharp fiscal adjustments that would slow the fragile economy.
US dollar notes
In its annual assessment of US financial strengths and weaknesses, the IMF also said that if the government does not hike its debt ceiling soon to accommodate current spending commitments, the impact could wreak havoc on global financial markets.
"Fiscal policy consolidation needs to proceed as debt dynamics are unsustainable and losing fiscal credibility would be extremely damaging," the Fund said.
"The main policy challenge is to implement a substantial and durable fiscal consolidation effort while ensuring that the still-fragile recovery remains on track."
The IMF said that, despite its dangerously heavy debt burden, the government needs to increase the US$14.29 trillion cap on borrowings to avoid defaulting on its debt and sparking "a severe shock to the economy and world financial markets."
The US Treasury has forecast that it could be forced to hold back payments on borrowings beginning on August 2 if the cap is not raised.
The IMF said US growth would remain slow, with the economy expanding 2.5 percent in 2011 and 2.7 percent annually over 2012-2013.
It said slow growth in the first half of this year -- the first quarter registered a dull 1.9 percent pace -- was in part the result of higher oil prices and "transient factors" like the disruptions to industry after the March 11 Japanese earthquake-tsunami disaster.
- AFP/ir
