U.S., Japan warned by IMF, rating agencies on debt

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U.S., Japan warned by IMF, rating agencies on debt

By Lesley Wroughton
WASHINGTON | Thu Jan 27, 2011 7:13pm EST
(Reuters) - The United States and Japan received sharp warnings from the IMF and ratings agencies on Thursday that they must tackle their huge budget deficits to avoid investors dumping their bonds, which would create a sovereign debt crisis and push up their borrowing costs.

Rating agency Standard & Poor's on Thursday cut Japan's long-term debt rating for the first time since 2002, and a day after a U.S. agency raised its 2011 budget deficit forecast by 40 percent.

In the United States, Moody's Investors Service warned said while the risk to the United States' coveted top triple-A rating was small, it was rising. For details, see

The International Monetary Fund had harsh words for both the United States and Japan, saying they urgently need to act to cut their deficits.

As a political battle heated up in Washington over the budget, the U.S. Treasury took steps to prevent the government from hitting a legal limit on its debt. Republicans are demanding spending cuts as the price of their support for raising the $14.294 trillion debt ceiling.

President Barack Obama this week announced a five-year freeze in annual domestic spending, which the White House estimates will save more than $400 billion over the next decade, but an International Monetary Fund official said on Thursday that more is needed.

Carlo Cottarelli, director of the IMF's Fiscal Affairs Department, said Washington must be more specific in detailing plans that go further.

One Republican warned that the United States faced the risk of a currency crisis if it did not get its debt under control. "We're getting closer to that all the time," said Texas Representative Ron Paul, who has long advocated a return to a requirement that the dollar be backed by gold.

In Europe, market pressures have forced many governments to adopt austerity budgets to bring down soaring borrowing costs, and the European Union is now locked in debate over whether a 440 billion euro bailout fund for its members is too small.

U.S., JAPAN LAGGING WITH CUTS

In a report on global debt, the International Monetary Fund patted Europe on the back for its efforts while declaring the United States and Japan as the budget-cutting laggards.

"In advanced economies where fiscal sustainability has not been a market concern, credible plans going well beyond 2011 need to be put in place urgently to lock in benevolent market sentiment," the IMF said.

"Renewed market pressures in some advanced economies demand that these countries underline their commitment to their deficit targets and devise contingency plans to ensure that adjustment goals are met," it added.

The fund said large European countries will all tighten their budgets this year broadly in line with earlier plans, with Spain making the deepest cuts.

The IMF's Cottarelli told reporters that markets were overestimating the risk of default or debt restructuring in Europe, following bailouts of Greece and Ireland.

http://www.reuters.com/article/idUST...+US+/+Top+News)