Tuesday, January 27, 2015   

IMF favors borrowing to spend in times of low interest
(04-04 09:53)

Austerity budgets and public spending cuts are less critical to economic health as interest rates in the major advanced economies remain historically low, the International Monetary Fund said.
The IMF traditionally calls on its member nations to rein in spending to reduce their budget deficits and public debt.
Market rates paid by nations to finance themselves “have declined substantially'' since the 1980s and now are even in “slightly negative territory'' when taking into account inflation, the 188-nation IMF said, in its World Economic Outlook report released ahead of next week's IMF/World Bank spring annual meetings.
Worldwide, the IMF said, the “10-year global real interest rates,'' a weighted average, has fallen from 5.5 percent in the 1980s, to 3.5 percent in the 1990s, to 2.0 percent between 2001 and 2008, and to slightly below zero in 2012.
“Real interest rates and the cost of capital are likely to rise only modestly from current levels,'' the report said.
In this scenario, states could choose to borrow to finance new spending without further deteriorating their finances because the cost of capital would be essentially zero, or even negative given inflation.
“Some increases in debt-financed government spending, especially public investment, may not increase public debt in the medium term,'' said the IMF, based on its expectation that interest rates will remain lower than economic growth for a prolonged period of time.
However, it warned that low interest rates pose potential risks to financial stability by encouraging investors to seek higher yields by taking on more risk.

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