–Urgent Policy Adjustments Needed To Avoid Stalling Global Recovery
–Should Extend Time Schedule For Greek Budget Deficit Targets

By Brai Odion-Esene

WASHINGTON (MNI) – The significant risks facing what is now a
struggling global economy underline the need for policy action on an
international basis to prevent the recovery from grinding to a halt,
the Institute of International Finance warned Thursday.

In a policy letter released ahead of the Oct. 12-14 IMF/World Bank
annual meeting in Tokyo, the Washington-based banking group also argued
that the focus in the battered eurozone periphery needs to be shifted
away from steep budget cuts to measures that will spur growth in the
medium term.

The global economy is at a crossroads, the IIF said, and the
IMF/World Bank meetings are taking place at a time of “weakening global
economic growth, high or rising unemployment and substantial downside

The group argued that the desired strong recovery in consumer
demand and business investment have been adversely affected by a weak
demand outlook, fiscal policy uncertainties, and the inconsistency
between tighter new regulations aimed at discouraging banks from taking
undue risks and monetary easing intended to spur bank lending.

So the current condition of the global economy means global policy
coordination is even more essential, it said, and, “Urgent policy
adjustments are needed to avoid the stalling global recovery and address
the strong negative spillover effects of national or regional
developments on other parts of the world.”

The priority for the embattled eurozone in particular, is to
decisively implement recently announced measures — such as direct bank
recapitalization by the new permanent bailout fund and bond buying by
the ECB — in order to maintain positive market sentiment.

With the euro area mired in a recession, and with the emphasis too
much on fiscal austerity, the IIF called for renewed growth to be
accorded greater priority.

“We share the view that there is an urgent need to re-orient the
current thrust of adjustment programs in peripheral countries from steep
fiscal adjustment and the attainment of nominal debt to GDP targets
toward a more medium-term pro-growth orientation, with greater emphasis
on structural reforms and fiscal consolidation based on structural
targets,” it said.

As for Greece and its drawn out negotiations over the next tranche
of its loan from international creditors, the IIF stressed that “it is
urgent to complete the ongoing review of Greece’s program, with an
extension of the time schedule of budget deficit targets.”

“The latter can and could be accommodated without additional new
financing by lowering interest charges on official credits in line with
markedly reduced funding costs,” it added.

A decision on the disbursement had been expected before the end of
October, but Greece’s talks with inspectors from the European
Commission, European Central Bank and International Monetary Fund — the
troika — have been bogged down over disagreement about the measures
Greece should take to reduce its public deficit by an additional E13.5

And the lack could mean a postponement of when eurozone nations
agree to release the funds to Greece. Germany, the Netherlands and
Finland want to postpone the decision on the loan tranche to Greece
until a meeting of euro area finance ministers on November 12, two
senior EU officials told MNI.

As for the U.S., it should be come as no surprise that the IIF
focused most of its recommendations on the nation’s deficits and the
need to tackle the looming fiscal cliff of spending cuts and tax hikes.

“Over the longer term, the challenges to public finances are
formidable,” the IIF said, adding that “without fiscal consolidation and
growth-enhancing measures, debt dynamics would be unsustainable.”

The immediate priority is to reach a bipartisan agreement on the
fiscal cliff, it said, calling for a balanced, credible and
comprehensive multi-year plan, as opposed to “peicemeal” temporary
measures that would only serve to prolong uncertainty.

Even the Federal Reserve’s recent actions to boost employment,
while welcome, could see its effectiveness limited without fiscal policy
action, the IIF cautioned.

** MNI Washington Bureau: 202-371-2121 **

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