1. Introduction

International Monetary Fund. Fiscal Affairs Dept.
Published Date:
September 2011
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Global fiscal risks remain very high, stemming from several unresolved, interrelated challenges:

  • Sustainability and market sentiment in the euro area. Despite significant fiscal adjustment in most advanced European economies and the mid-July 2011 agreement by leaders of the euro area countries to improve the tools available to fight crises, borrowing costs remain high in several euro members, reflecting market participants’ concerns about the sustainability of fiscal policies and public debts. Such concerns—which had their origin in weak fiscal fundamentals but subsequently intensified owing to doubts about the credibility of the euro area crisis resolution mechanisms—jeopardize the stability of the area, with major potential spillovers for other sovereign debt markets.

  • Medium-term fiscal adjustment in the United States and Japan. Fiscal deficits remain at near-record levels in the two largest advanced economies, and their debt ratios continue to rise. These two countries benefit from large stores of goodwill from investors, but these favorable conditions could shift if needed policy changes are not forthcoming.

  • Using good times wisely in emerging economies. There are risks of complacency, with the key question being whether fiscal balances should not be strengthened more rapidly, given output gaps that have essentially closed in many emerging economies, rising inflation, and strong revenues, particularly for commodity exporters.

  • Debt overhang from the crisis and long-term challenges. For both advanced and emerging economies, the debt burden created by the crisis needs to be reduced, over the longer term, against the rising tide of health care and pension spending. The challenges confronting many economies in this regard are essentially without precedent.

  • High food and fuel prices in low-income countries. Many low-income countries made appropriate use of countercyclical policies to address the impact of the global crisis. Now, they need to rebuild fiscal buffers while responding to pressures from high food and fuel prices and, over the medium term, to increase investment to foster more rapid growth.

This Monitor reviews these topics in the following sections. The analysis is informed by in-depth appendixes on four topics: (i) “fiscal devaluation”; (ii) privatization; (iii) the importance of monitoring both gross and net government debt; and (iv) the contribution of stock-flow adjustments to government debt dynamics.

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