IMF: Required Austerity Measures May Have Been Too Drastic

US Money

The International Monetary Fund released a report in which it claims that austerity measures should be tempered so as not to cause too much damage to economies, Bloomberg reports. The IMF expressed concern that it was not optimal to solve fiscal imbalances in the short term.

For many countries that faced rising debts during the recent crisis, fiscal imbalances became so large that it was impossible to do so. The imposition of strict austerity measures often failed to eliminate debt while simultaneously causing damage to struggling economies. This, in turn, makes it harder to emerge from economic stagnancy, thus prolonging the existence of the remaining debt and simultaneously delaying any hopes of an economic recovery.

On the other hand, the IMF also warned against keeping levels of debt too high in the long term. Not only does this leave little room for additional borrowing if funds are needed for emergencies or economic crises, but it causes countries to have to sell bonds at higher rates because investors require additional return to compensate for the risk associated with the high debt levels. This is especially pertinent for countries trying to put together an economic recovery in the eurozone where bonds are an important part of providing financing, and for emerging economies, where bond rates have risen in the past few months over concerns over the tapering of American quantitative easing.

Olivier Blanchard, the chief economist of the IMF, has expressed sentiments that austerity measures required for such countries such as Portugal and Greece have significantly delayed their recoveries. Since those nations needed funding from groups such as the IMF and the European Stability Mechanism, stricter goals were put into place about making cuts, which, in turn, left little room for policies to promote the economies out of the recession. Now, few would use the word “recovery” to describe the situation for countries in southern Europe, considering that unemployment in Spain and Greece is still near the 25 percent mark.

Reuters reports that the IMF did have some positive news, including the effectiveness of fiscal stimuli in times of economic contraction despite interest rates remaining at all-time lows for extended periods of time. Bond buying schemes, which some said would not aid the economy, were effective so long as investors remained convinced that governments would bring debts under control in longer-term time frames.

What the report did not conclude– and what many investors are still wondering– is when debts will have to be reigned in before confidence in the world’s top economies, such as the U.S. and Japan, wanes in the face of what seems to be a perpetual spiral of borrowing.