IMF Signals Spain, Portugal Must Step Up Budget Cuts

First deputy director of IMF John Lipsky.
First deputy director of the IMF John Lipsky. Photographer: Tony Avelar/Bloomberg

European countries saddled with debt should focus on cutting deficits in the wake of policy makers’ unprecedented efforts to contain the region’s sovereign-debt crisis, the International Monetary Fund’s No. 2 official indicated.

The rescue package “is an important step,” John Lipsky, the first deputy director at the fund, said in an interview with Bloomberg Television. “Now let’s see what happens in other countries that need to undertake adjustment programs.”

Lipsky spoke as the euro surrendered gains made after the European Union’s announcement of a rescue package of almost $1 trillion to the region’s most indebted nations. Investors are concerned the measures won’t be enough to prevent the crisis from spreading to countries including Spain and Portugal, which are also tackling growing deficits.

“The root of the problem is the fiscal situation” of Greece, Spain and Portugal, said Osamu Tanaka, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “Plans probably won’t go as smoothly as planned, and the market will probably continue to go through bouts of uncertainty.”

Europe’s currency fell 0.5 percent to $1.2720 at 3:04 p.m. in Tokyo, from $1.2787 yesterday, when it soared as much as 2.7 percent. Against the yen, it slid 1.2 percent to 117.82.

Pledged to Cut

Spain and Portugal have pledged to pare spending as part of the European Union loan package agreement. Deficits are set to reach 8.5 percent of gross domestic product in Portugal and 9.8 percent in Spain this year, above the euro region’s 3 percent limit. Both countries promised “significant” additional budget cuts in 2010 and 2011, to be outlined this month.

Lipsky told reporters yesterday the IMF hasn’t made a “blanket commitment” to contribute to the European rescue plan, though it has “ample funds” to take part. He applauded efforts by the region’s policy makers, which include plans for the European Central Bank to purchase debt.

“This was a very big step by the ECB in support, in conjunction with the actions taken by the euro area countries,” Lipsky said in the interview from Washington. “No one’s saying that this is easy, but it would be simply unrealistic to say nothing important has happened.”

U.S. Support

The Washington-based IMF’s board of directors discussed the European aid mechanism yesterday, Lipsky said. U.S. authorities have been “very supportive and encouraging,” he said. He said the IMF isn’t in talks for aid with any individual country sharing the euro.

“The bedrock of dealing with these problems are the efforts of stabilization and adjustment of each of the individual countries,” Lipsky told reporters yesterday. “Virtually all advanced economies” will need to reduce their deficits over the next few years, he said.

The IMF approved a separate 30-billion euro loan to Greece as part of that nation’s 110-billion euro package with governments from the 16-nation bloc sharing the currency.

“The template for the relationship between the euro zone countries and the IMF in cases of need for support would follow the template in broad terms established in the case of Greece,” Lipsky said.

Greece must persevere with its fiscal rehabilitation program to ensure the nation’s debt burden is sustainable, the fund said in a report published late yesterday.

“With disciplined program implementation, Greece’s debt is expected to be sustainable in the medium term, and its repayment capacity to be adequate,” the IMF said. It projected Greece’s ratio of debt to GDP will peak at 149 percent in 2013 and then decline, “provided that the authorities continue to implement strong and sustained fiscal and structural reforms.”

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