IMF urges US to cut budget deficit

Highlighting imbalances as a threat that could destabilise the world economy, the International Monetary Fund urged the United States yesterday to cut its budget deficit more aggressively than planned and said China should slowly allow its currency to float.

In a speech to the National Press Club in Ottawa, and then in comments to reporters, IMF managing director Rodrigo Rato said the United States needed bolder efforts to cut its budget deficit before baby boomers retire.

He said the capital movements needed to sustain a widening US current account deficit could not be sustained long term, and warned that investors might one day lose their appetite for US assets.

"When we speak of global imbalances, we often are referring to the large current account deficit in the United States, and the matching surpluses in other countries," Mr Rato said in his prepared remarks.

"Unless action is taken... to facilitate an orderly resolution of these imbalances, we run the risk of investors drastically reducing the flow of capital into the United States. In that event, the dollar could depreciate rapidly, currency and capital markets could become disorderly, and interest rates could rise sharply, posing serious threat to global economic stability."

Mr Rato said there was no sign at present that capital flows to the United States were ebbing, but that could change if markets took a "more negative" approach.

He noted that the United States had promised action to halve its budget deficit over five years from 2006, and said these proposals needed "firm implementation."

Mr Rato said Europe and Japan need to step up efforts to make their labour markets more flexible, and China, both in its own interest and in the interests of other countries, should adopt a more flexible exchange rate. - (Reuters)