IMF CHIEF WARNS IMBALANCES DANGEROUS FOR RECOVERY

Singapore, February 2 (AFP)- Widening imbalances across and within countries are sparking tensions which threaten to derail the fragile global economic recovery, the IMF chief said Tuesday.

Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned that these tensions could lead to rising protectionism, social and political instability and even spark war.

"While the recovery is underway, it is not the recovery we wanted," he said at a public lecture in Singapore.

"It is a recovery beset by tensions and strains -which could even sow the seeds of the next crisis. I see two dangerous imbalances”.

He said the different pace of recovery between advance and emerging economies was unbalanced and echoed the situation just before the global economic crisis struck in late 2008.

"While growth remains below potential in the advance economies, emerging and developing economies are growing much faster -and some may soon be overheating," he said.

Growth in economies with large external surpluses like China and Germany is still being powered by exports, while expansion in deficit-stricken countries such as the United States was being driven by domestic demand, he noted.

"These global imbalances put the sustainability of the recovery at risk," he said.

Strauss-Kahn said the second risk is the imbalance happening within countries, citing the growing army of unemployed workers and widening income gaps.

For example, unemployment was a "strong undercurrent of the political turmoil in Tunisia and of rising social strains in other countries", he said.

Nationwide demonstrations last month led to the ouster of Tunisian strongman Zine El Abidine Ben Ali, and massive street protests are underway in Egypt seeking an end to the 30-year rule of President Hosni Mubarak.

"As tensions between countries increase, we could see rising protectionism -of trade and of finance," Strauss-Kahn said.

"And as tensions within countries increase, we could see rising social and political instability within nations -even war”.

The IMF is ready to help Egypt put in place an economic rebuilding policy, Strauss-Kahn said, as the country braced for escalating protests.

"The IMF is ready to help in defining the kind of economic policy that could be put in place," he said.

Strauss-Kahn said Tuesday he did not see the United States having problems financing its massive deficit.

The United States has "no kind of problem in financing their deficit," he said in a public lecture in Singapore.

The US Congressional Budget office in Washington projected last month that the US budget deficit will hit a record-breaking $1.5 trillion this year, due in part to a recent tax cut deal.

Constrained revenues and increased spending to revive the economy will push the deficit to 9.8 percent of gross domestic product, according to the forecast.

Also last month, bond rater Moody's warned that the time is coming for Washington to deal with its growing budget deficit.

It warned that "the probability of assigning a negative outlook (on US government bonds) in the coming two years is rising”.

"Although no rating action is contemplated at this time, the timeframe for possible future actions appears to be shortening," Moody's said in a report on its evolving view of US finances.

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