Debt high, too early to adjust fiscal policies - IMF

By Lesley Wroughton

WASHINGTON (Reuters) - The International Monetary Fund on Tuesday projected higher debt levels for the world's major economies, but said the global economic recovery was still too fragile to begin withdrawing fiscal support.

In its latest edition of "Cross-Country Fiscal Monitor," the IMF said major economies' government debt as a percentage of gross domestic product is projected to hit 118 percent by 2014.

Only Australia, Canada and South Korea would have debt ratios well below 90 percent, the IMF said.

Much of the increase in debt in the Group of Seven rich countries has come as governments bailed out banks and resuscitated economies while tax revenues have fallen.

New IMF research shows that if governments do not undertake fiscal adjustments and debt levels remain around 118 percent of GDP, then interest rates would rise by up to two percentage points over the medium term.

But for now, fiscal support in advanced economies was "appropriate" and should remain in place until the recovery was self-sustaining, said Carlo Cottarelli, director of the IMF's Fiscal Affairs Department.

Speaking on a conference call with reporters, he said fiscal policy in advanced economies would likely remain supportive through next year, but fiscal tightening is expected to begin in faster-growing, emerging market countries in 2010.

The average debt level for major emerging economies is likely to decline moderately after 2010 and remain below 40 percent of GDP, assuming discretionary fiscal tightening in some countries next year, the IMF said.