Highlighting the Risks of Rising Public Debt

That was the key conclusion of a high-level conference on "Exiting from High Public Debt" that was recently held at the IMF’s Paris offices.

The conference, cosponsored by the IMF’s Fiscal Affairs Department and the Fund’s Offices in Europe, brought together central bank and finance ministry officials from 28 European countries, along with representatives from the European Commission, international financial institutions, think tanks, the private sector, and academia.

The discussion on high debt levels comes at a time when attention is now shifting to focus on the unprecedented size of the stimulus measures that were needed to rescue economies worldwide, as well as how and when governments can begin to rein in spending.

In a recent IMF blog post, Marek Belka, Director of the IMF’s European Department wrote, "Much is riding on getting the timing of the exit right from the stimulative policies used to combat the global economic and financial crisis. Exiting too early may jeopardize the recovery. But exiting too late may sow the seeds for the next crisis."

Recovery underway, but fragile

There are signs that the global economy is recovering faster than expected in response to these unprecedented government stimulus efforts. Speaking in Hong Kong the day following the conference, IMF Managing Director Dominique Strauss-Kahn said, "The global recovery appears to be stronger than previously anticipated. However, the situation remains fragile and recovery is proceeding at different speeds in various regions."

At the conference, participants voiced similar words of caution, recognizing that continued vigilance against a double-dip recession is essential. Yet they also said that it is crucial in the medium term to exit from the high levels of public debt taken on in the stimulus effort.

New risks apparent

In an opening address to the conference, IMF Deputy Managing Director Murillo Portugal said that public debt in the advanced G-20 economies could reach the equivalent of 118 percent of gross domestic product by 2014, which would be 40 percentage points above pre-crisis debt levels. By contrast, Portugal said, public debt levels in the emerging market G-20 countries are projected to fall to below 40 percent of GDP next year, reflecting lower initial debt levels, projected faster growth, and earlier withdrawal of fiscal stimulus measures.

"Governments...