Countries should observe “speed limits” and avoid narrowing fiscal deficits too quickly, even when they face pressure from investors justifying a large debt reduction, according to International Monetary Fund staff.
“As we have seen for some euro-area members, countries in a weak fiscal position that are facing market pressure or have lost market access have undertaken large and front-loaded adjustments,” according to a report by IMF economists released today. The research compiles lessons from the global financial crisis and the debt turmoil that followed in Europe.
“In many countries, fiscal imbalances are of such magnitude that addressing them in the near term would require adjustment on a scale that would dramatically impact economic activity and would have devastating consequences for the provision of government services,” the staff said in the report.