Countries with healthy economies need to take “early action” on deficits to avoid the sovereign debt crises that have beset Spain and Ireland, said Jaime Caruana, general manager of the Bank for International Settlements.
Deficit rules are especially important for countries that belong to a monetary union such as the euro, Caruana said today in an interview on the sidelines of the International Monetary Fund’s spring meetings in Washington. The Basel, Switzerland-based BIS coordinates central bank initiatives on financial stability and regulation.
“Acting in the good times is to me a key element,” said Caruana, the former governor of the Bank of Spain. “It is better to do it early action than just relying on sanctions at the end when it is very, very difficult.”
When asked during a panel discussion whether euro-area countries in a situation such as Greece’s should restructure their debt, Caruana responded that restructuring is a “very difficult” and costly choice. “I can understand very well that this is not on the table,” he said.
The IMF and Group of 20 nations are gathering this week as the U.S. and Europe battle over when and how to rein in budget deficits. The European Union has so far assembled bailouts for Greece, Ireland and Portugal and now is working on policies aimed at limiting debt and preventing further crises.
French Finance Minister Christine Lagarde called today for policies with “a degree of automaticity” that would impose sanctions on countries that breach national requirements. Such rules need a penalty “that bites, that has teeth,” she said at a Bertelsmann Foundation event.
Caruana praised broader monitoring initiatives that look at productivity and other indicators as well as debt and deficit levels. In a panel discussion today, he said that the U.S., the U.K. and Germany have so far not faced market scrutiny and should take heed of other countries’ experiences.
Spain and Ireland had relatively low debt levels heading into the crisis and then found that market perceptions of systemic risk can change “very, very rapidly,” he said. “Deficit levels that were considered sustainable at some point in time, suddenly they are not sustainable,” he said.
In the U.S., the Obama administration is seeking Republican support for its plan to trim $4 trillion over the next 12 years, while also urging lawmakers to raise the $14.29 trillion debt limit before the Treasury Department runs out of borrowing room. Republicans want steeper and swifter cuts.
Treasury Secretary Timothy F. Geithner, who has warned that the debt limit could be reached as soon as May 16, called April 13 for a “basic framework of targets and limits” that would put the U.S. on a path to bring down deficits over time.
Strict limits haven’t done a good job of forcing political agreement in the U.S., said Congressional Budget Office director Douglas Elmendorf, speaking on the IMF panel.
“Rules can be valuable ways of enforcing deals that have been cut, of preventing or hindering backsliding that might occur,” Elmendorf said. “They’ve not proven, in this country at least so far, to be very effective in forcing deals to happen.”