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IMF head: Abandon austerity for stimulus

Sept. 5, 2011 at 3:30 AM   |   Comments

HAMBURG, Germany, Sept. 5 (UPI) -- Washington should abandon fiscal austerity policies and switch to fiscal stimulus to avoid a double-dip recession, the International Monetary Fund head says.

The United States has "enough room in the short term to put in place measures that will actually stimulate growth and help create employment," Managing Director Christine Lagarde told the German magazine Der Spiegel.

But she said she did not propose fighting the debt-crisis effects with more debt and said Washington would need to supplement stimulus measures with a credible medium-term debt strategy.

In finance, "short term" usually refers to less than a year and "medium term" usually refers to one to three years.

"We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the U.S. from its AAA status," she said.

"Measures need to be taken to ensure that this vicious circle is broken."

The Standard & Poor's credit-rating agency took the unprecedented step Aug. 5 of removing the U.S. government from its AAA list of risk-free borrowers, a downgrade that had symbolic significance but few clear financial implications, economists said.

Europe similarly needs to shift to stimulus from austerity, said Lagarde, a former French finance minister who took over as IMF head July 5.

The intergovernmental IMF oversees the global financial system and provides low-cost loans to countries in financial crisis. Its loans generally come with tough conditions requiring borrowers to clean up their balance sheets with deep spending cuts or currency devaluations.

Lagarde said at a central bankers conference in Jackson Hole, Wyo., Aug. 27 the global economy's "downside risks" were increasing -- and the risks were "aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed" to turn their economies around.

"Developments this summer have indicated that we are in a dangerous new phase," she said at the conference. "The stakes are clear -- we risk seeing the fragile recovery derailed."

But she told Der Spiegel in an interview published Sunday the fragile recovery could avoid being derailed "if governments, institutions and central banks work together."

"The spectrum of policies available" has narrowed "because a lot of ammunition was used in 2009," often viewed as the economic crisis's turning point, but the U.S. and world economies can avoid a "threatening downward spiral" into a double-dip recession, she said.

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