'Wartime' debt threat to global economy: Lagarde

Posted at 10/12/12 2:02 PM

 TOKYO - Public debt in developed countries standing at "wartime levels" is the biggest threat to the global economy, IMF chief Christine Lagarde warned in Tokyo on Friday.

The International Monetary Fund's managing director said the creaking debt loads were leaving governments at the mercy of the markets and needed to be reduced.

"Without growth, the future of the global economy is in jeopardy, and perhaps the greatest roadblock will be the huge legacy of public debt, which now averages 110 percent in advanced economies, pretty much wartime levels," Lagarde said.

"And this leaves governments highly exposed to subtle shifts in confidence," she said.

"We have seen it. We are seeing it in the eurozone for instance. It also ties the governments' hands, especially as they seek to build the infrastructure of the 21st century while keeping the policies, particularly the social promises of the 20th century," she said.

Lagarde was speaking at the annual meetings of the International Monetary Fund and the World Bank in Tokyo, where she said Thursday the Fund was happy for Greece to have an extra two years to bring its runaway deficit in line with the demands of global creditors.

Painful budget-slashing, especially in Europe, is being blamed in some quarters for the sluggish pace of recovery in the world economy.

Naysayers maintain that too-deep cuts in public spending curb revenues, which dampens the economy at a time it needs to be pushed forwards.

Lagarde on Thursday appeared to soften slightly on the need for trimming fiscal cloth, when she said: "Instead of frontloading heavily it is sometimes better... to have a bit more time."

On Friday she said reducing public debt was vital, but noted it was "incredibly difficult without growth".

"High debt in turn makes it harder to get growth, so it's a very narrow path that needs to be taken," she said.

"It's probably a long path and one for which there's probably no short cuts either but that's the path that needs to be taken," she said.

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