January 8, 2004
I.M.F. Says Rise in U.S. Debts Is Threat to World's Economy
By ELIZABETH BECKER and EDMUND L. ANDREWS
WASHINGTON, Jan. 7 With its rising budget deficit and
ballooning trade imbalance, the United States is running up a foreign
debt of such record-breaking proportions that it threatens the
financial stability of the global economy, according to a report
released Wednesday by the International Monetary Fund.
Prepared by a team of I.M.F. economists, the report sounded a loud
alarm about the shaky fiscal foundation of the United States,
questioning the wisdom of the Bush administration's tax cuts and
warning that large budget deficits pose "significant risks" not just
for the United States but for the rest of the world.
The report warns that the United States' net financial obligations to
the rest of the world could be equal to 40 percent of its total economy
within a few years "an unprecedented level of external debt for a large
industrial country," according to the fund, that could play havoc with
the value of the dollar and international exchange rates.
The danger, according to the report, is that the United States'
voracious appetite for borrowing could push up global interest rates
and thus slow global investment and economic growth.
"Higher borrowing costs abroad would mean that the adverse effects of
U.S. fiscal deficits would spill over into global investment and
output," the report said.
White House officials dismissed the report as alarmist, saying that
President Bush has already vowed to reduce the budget deficit by half
over the next five years. The deficit reached $374 billion last year, a
record in dollar terms but not as a share of the total economy, and it
is expected to exceed $400 billion this year.
But many international economists said they were pleased that the
report raised the issue.
"The I.M.F. is right," said C. Fred Bergsten, director of the Institute
for International Economics in Washington. "If those twin deficits of
the federal budget and the trade deficit continue to grow you are
increasing the risk of a day of reckoning when things can get pretty
Administration officials have made it clear they are not alarmed about
the United States' burgeoning external debt or the declining value of
the dollar, which has lost more than one-quarter of its value against
the euro in the last 18 months and which hit new lows earlier this week.
"Without those tax cuts I do not believe the downturn would have been
one of the shortest and shallowest in U.S. history," said John B.
Taylor, under secretary of the Treasury for international affairs.
Though the International Monetary Fund has criticized the United States
on its budget and trade deficits repeatedly in the last few years, this
report was unusually lengthy and pointed. And the I.M.F. went to
lengths to publicize the report and seemed intent on getting American
"I think it's encouraging that these are issues that are now at play in
the presidential campaign that's just now getting under way," said
Charles Collyns, deputy director of the I.M.F.'s Western Hemisphere
department. "We're trying to contribute to persuade the climate of
public opinion that this is an important issue that has to be dealt
with, and political capital will need to be expended."
The I.M.F. has often been accused of being an adjunct of the United
States, its largest shareholder.
But in the report, fund economists warned that the long-term fiscal
outlook was far grimmer, predicting that underfunding for Social
Security and Medicare will lead to shortages as high as $47 trillion
over the next 70 years or nearly 500 percent of the current gross
domestic product in the coming decades.
Some outside economists remain sanguine, noting that the United States
is hardly the only country to run big budget deficits and that the
nation's underlying economic conditions continue to be robust.
"Is the U.S. fiscal position unique? Probably not," said Kermit L.
Schoenholtz, chief economist at Citigroup
Global Markets. Japan's budget deficit is much higher than that of the
United States, Mr. Schoenholtz said, and those of Germany and France
are climbing rapidly.
In a paper presented last weekend, Robert E. Rubin, the former
secretary of the Treasury, said that the federal budget was "on an
unsustainable path" and that the "scale of the nation's projected
budgetary imbalance is now so large that the risk of severe adverse
consequences must be taken very seriously, although it is impossible to
predict when such consequences may occur."
Other economists said they were afraid that this was a replay of the
1980's when the United States went from the world's largest creditor
nation to its biggest debtor nation following tax cuts and a large
military build-up under President Ronald Reagan.
John Vail, senior strategist for Mizuho Securities USA, said the I.M.F.
report reflected the concerns of many foreign investors.
"I would say they reflect the majority of international opinion about
the United States," he said. And he added, "The currency doesn't have
the safe-haven status that it has had in recent years."
Many economists predict that the dollar will continue to decline for
some time, and that the declining dollar will help lift American
industry by making American products cheaper in countries with
"In the short term, it is probably helping the United States," said
Robert D. Hormats, vice chairman of Goldman
Fund officials and most economists agreed that the short-term impact of
deficit spending has helped pull the economy through a succession of
crisis. And unlike Argentina and other developing nations that suffered
through debt crises, the United States remains a magnet for foreign
Treasury Secretary John W. Snow did not address the fund's report
directly. But in a speech to the United States Chamber of Commerce on
Wednesday, he said Mr. Bush's tax cuts were central to spurring growth
and reiterated the administration's pledge to reduce the deficit in
half within five years.
"The deficit's important," Mr. Snow said. "It's going to be addressed.
We're going to cut it in half. You're going to see the administration
committed to it. But we need that growth in the economy. We had an
obligation to the American work force and the American businesses to
get the economy on a stronger path. We've done it and we have time to
deal with the deficit."
But the report said that even if the administration succeeded it would
not be enough to address the long-term problems posed by retiring baby
Moreover, the fund economists said that the administration's tax cuts
could eventually lower United States productivity and the budget
deficits could raise interest rates by as much as one percentage point
in the industrialized world.
"An abrupt weakening of investor sentiments vis-à-vis the dollar
could possibly lead to adverse consequences both domestically and
abroad," the report said.