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IMF presses advanced economies to build confidence

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(Globalpost/GlobalPost)

The International Monetary Fund urged leading powers Saturday to step up growth and reforms to generate jobs, warning that confidence in the global economy was in short supply.

They also warned emerging and smaller economies to shore up their financial defenses in anticipation of turbulence as leading economies charge up growth with extraordinary monetary stimulus and low interest rates.

"The world economy still faces a crisis of confidence, as Europe still struggles with recession and its peripheral crises, and the US and Japan still lack credible plans to bring down their huge debt and deficit burdens," said Tharman Shanmugaratnam, who chairs the IMF's steering committee.

"The commodity that is in shorter supply now is confidence... Confidence needs to be strengthened by stronger predictability in medium-term fiscal policy."

IMF Managing Director Christine Lagarde, in a fresh IMF policy agenda, urged Europe, the United States and Japan to act more resolutely to build up confidence in a future of sustainable growth.

"The global economy has avoided the worst, but it is by no means out of the woods, and prospects may be diverging," she said.

In a "report card" on progress over the past year, she said major calamities had been averted, like the fracture of the eurozone.

But Lagarde still gave the developed economies poor grades.

"US public finances remain unsustainable and a comprehensive and backloaded plan involving higher revenues and entitlement reform is urgently needed," she said.

In Japan, with one of the world's largest debt loads, short-term fiscal stimulus is heightening risks to state finances, and Tokyo needs to come up with an "ambitious" plan to cut its deficits and sustain growth over the medium term, the IMF chief added.

In Europe, she warned, "the euro area has the clearest need to balance supporting growth with needed reform."

Deep austerity programs demanded of the troubled periphery economies like Greece, Italy and Portugal are leading to "adjustment fatigue" with growing tensions over the fairness of adjustment, according to Lagarde.

At the same time, she questioned whether the breathing space earned by the monetary expansion programs "is being used by advanced economies to make progress on deeper fiscal, financial and structural reforms."

In a press conference after the International Monetary and Financial Committee meeting, Shanmugaratnam, Singapore's deputy prime minister, linked completing reforms in developed economies to fighting unemployment.

"Monetary policy accompanied by structural reforms that give a chance to young people to get jobs, structural reforms that help companies to upgrade and improved productivity, is much more likely to succeed," he said.

Growth and jobs was a "strong focus" of two days of IMF meetings with the World Bank in Washington, he said.

The IMF chiefs warned meanwhile that with advanced economies pumping out money to stimulate growth, others need to build up buffers to protect themselves from asset market bubbles and other side-effects, including the whiplash that could come when those loose monetary policies are tightened.

"Many emerging market economies are concerned about the possible blow to output and financial system if large inflows of capital reverse rapidly," Lagarde said in her IMF agenda.

The IMF's call appeared to be accepted by the finance ministers and central bank chiefs of the G20 leading economies, who in a statement on Friday pledged "ambitious" steps to spur growth and job creation.

Some officials at the G20 talks, on the sidelines of the IMF-World Bank spring meetings, said the focus was mostly on Europe. Germany, which has been setting the tone of eurozone reforms and growth efforts, has a "pragmatic" outlook, they said.

However, German Finance Minister Wolfgang Schaeuble sounded less flexible on pressure to ease the tough austerity programs required of periphery countries.

"Nobody should have the misunderstanding that there is an alternative for reducing deficits," Schaeuble told reporters.

"It is not a German position, it is a common position... We are totally united."

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http://www.globalpost.com/dispatch/news/afp/130420/imf-presses-advanced-economies-build-confidence