MercoPress. South Atlantic News Agency

IMF warns about possible “full blown sovereign debt crisis” in rich nations

Budget deficit reductions triggered riots in Greece

Risks are still high that developed nations will face difficulties in rolling over their debt and possibly trigger a crisis the International Monetary Fund said in its “Fiscal Monitor” report released this month.

The report assessed the odds of a “full-blown sovereign debt crisis of regional or global relevance, which could emerge as a result of solvency concerns in the short or medium term.”

“Rollover risks remain at high levels in advanced economies and, to a lesser extent, in emerging economies” the IMF said. It cited investors’ “particularly high degree of risk aversion with regards to the European countries under market pressure.”

Six months after the IMF and European authorities crafted an emergency backstop to stem a Greece-born sovereign debt crisis investors are concerned that Ireland will struggle to reduce its budget deficit.

Rich nations’ borrowing needs are going to increase next year, with Japan’s remaining the largest at almost 58% of its GDP, according to the agency. The US needs will rise to almost 28% of its economy, it estimates. Other countries over 20% include Greece, Belgium, Italy, France and Portugal.

Public debt outstanding will expand to about 108% of developed nations’ economies by 2015 from 73% in 2007, the IMF said. In five years, Japan, Greece, Italy, Ireland and the U.S. will be the rich nations with the largest debt levels, the IMF predicts.

The end of fiscal stimulus, nonetheless, “will start in earnest in 2011 for most countries,” with deficits forecast to narrow by 1.25 percentage points of GDP in advanced economies as a whole, the IMF estimates. Still, there will be “considerable differences in the pace of adjustment” across nations, the IMF said.

“In general the announced size and speed of adjustment strike the right balance between fiscal consolidation and cyclical needs” the IMF said in the report. Still, “many countries have yet to specify their longer-term fiscal policy objective, notably the level to which they intend to reverse their public debt ratio”.

IMF predicted budget deficits in advanced economies to narrow to an average 8.1% of GDP this year from 8.9% in 2009, though it said the reduction mainly reflected a decline in support to the financial industry in the U.S.

The U.S. will post the second-largest budget deficit among advanced economies this calendar year at 11.1% of GDP, behind Ireland’s 31.9%, the IMF predicted.