–IMF Off’l: If US Goes Over ‘Fiscal Cliff’ Could Shock Global Economy
–Supporting Recov In N-Term, Tackling Fiscal Issues Wld Aid Global Econ

By Brai Odion-Esene

WASHINGTON (MNI) – The International Monetary Fund Thursday said
the Federal Reserve will have to maintain its highly accommodative
policies “for quite some time,” citing a sharp rise in downside risks
and its expectation that the economy will only grow at a moderate pace
this year and in 2013.

In the executive board assessment following its annual review of
the U.S. economy, known as the Article IV consultation, the IMF noted
that the U.S. economy continues to grow at a “tepid pace”, with fiscal
policy beginning to weigh on growth, as the budget deficit is being
gradually reduced.

It forecast growth to remain moderate in 2012 and 2013, constrained
by household deleveraging, fiscal restraint, and subpar global demand.
“A stronger dollar and weaker global demand are projected to weigh on
exports,” the IMF added.

In addition, “downside risks around the outlook have intensified,
including from the worsening of the euro area debt crisis as well as the
uncertainty over domestic fiscal plans,” it said.

Roberto Cardarelli, Division Chief in the IMF’s Western Hemisphere
Department, told reporters during a conference call that the
ramifications if the U.S. goes over the ‘fiscal cliff’ could be quite
negative, with stock markets declining, spillover to trading partners
like Mexico, Canada, and “inflicting a very sizable shock on the global
economy.”

The U.S. banking system is also subject to risks from an
intensification of stresses in global financial markets, the IMF said.

“They noted that persistently high long term unemployment creates
the risks of human capital losses and reduced attachment to the labor
force,” the IMF said.

As a result, IMF executive directors urged U.S. policymakers to use
effectively the “limited” policy space available to support the recovery
in the near term and restore medium term fiscal sustainability with a
balanced approach to consolidation.

“This will be important also to assist the global recovery, given
the systemic importance of the United States,” it said.

“Directors broadly agreed that monetary policy will need to remain
highly accommodative for quite some time,” it said, with most seeing
room for further easing should the outlook deteriorate.

However, the IMF did note that “a number” of directors felt the
effectiveness of additional monetary easing could be limited given the
current very low interest rate environment.

In addition, “some Directors highlighted the potential adverse
global spillover effects of very low interest rates through capital
flows and higher commodity prices,” the IMF said.

“Directors also noted that, while the United States external
current account deficit has declined, the external position remains
weaker than justified by fundamentals and desired policies,” it added.

A discussion of the United States would not be complete these days
without a mention of looming fiscal cliff, and the IMF said directors
highlighted the need to adopt a measured pace of deficit reduction “that
does not sap the recovery.”

“In particular, Directors agreed that removing the uncertainty
created by the ‘fiscal cliff’ in 2013 and promptly raising the debt
ceiling are both critical,” it said.

“They stressed the importance of agreeing as early as possible on a
comprehensive medium term fiscal consolidation plan, based on both
higher revenues and lower entitlement spending, that would stabilize the
debt ratio by mid decade and gradually reduce it afterwards,” it added.

The IMF also had some words of advice concerning another key pillar
of the U.S. economy, the still-weak housing market. Directors, it said,
pushed for the “timely and aggressive” implementation of recent actions
and proposals unveiled by the White House to bolster housing.

Given the importance of the housing sector to the economic
recovery, the IMF directors agreed that further measures may be needed,
including measures to expand the conversion of foreclosed houses into
rental units, allowing mortgages to be modified in personal bankruptcy
courts, and facilitating refinancing on a larger scale.

With regards to the financial sector, the IMF executive board
“emphasized the need to increase the resilience of the U.S. financial
system,”

Their recommendations included strengthening the regulation of
money market mutual funds, finalizing the Volcker Rule — “with due
consideration of its cross border implications” — accelerating the
adoption of Basel III capital rules, and winding down the role of
government-sponsored entities.

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

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