WRAPUP 2-Europe uneasy in IMF spotlight as Tokyo meetings start
(Updates with start of meetings; adds comments from Germany, Brazil)
* Europe wants more focus on U.S. fiscal woes * Germany: Europe is not the source of all problems * Mixed reviews on IMF call for slower budget cuts
* Lagarde continues blunt message on need to reform financial system
By Anna Yukhananov and Gernot Heller
TOKYO, Oct 12 (Reuters) - Greece, Spain and the euro zone's slow progress toward debt reform took centre stage at IMF meetings on Friday despite Europe's best effort to remove itself from the spotlight.
The International Monetary Fund recommended that some of Europe's debt-burdened countries take a bit more time to reduce budget deficits, arguing that moving too fast is counter-productive because it hurts the economy.
The shift was welcomed by some emerging market countries as well as long-time critics who say that the tough conditions attached to IMF loans inflict undue economic pain and make it harder for countries to grow their way out of debt.
"We have been arguing for some time that single-minded and draconian fiscal policies may be counterproductive and have a tendency to backfire," said Brazilian Finance Minister Guido Mantega.
But Germany, Europe's largest creditor country and the key to any lasting fiscal reforms, pushed back against that advice and said reversing course on promised deficit reductions would only weaken credibility.
Finance Minister Wolfgang Schaeuble said Europe had made plenty of crisis-fighting progress, echoing comments from other European officials who said there should be greater attention paid to U.S. fiscal troubles too.
"Europe is not the source of all problems in the world," he told reporters at a briefing on Friday.
The primary focus is on Greece, which has missed a series of debt reduction targets, and Spain, which is under pressure to seek a bailout as it struggles to rein in central government spending, get a grip on regional debts and recapitalise banks.
IMF Managing Director Christine Lagarde said on Thursday that both countries should be given more time to make needed fiscal adjustments.
The IMF's change of tune on the speed of budget cuts stems from research it released this week showing that aggressive fiscal consolidation crimps economic growth more sharply than previously thought.
Nobel prize-winning economist Paul Krugman called the IMF's new research, contained in its latest World Economic Outlook, "an extensively documented exercise in hand-wringing."
"Kudos to the Fund for having the courage to say this, which means bucking some powerful players as well as admitting that its own analysis was flawed," Krugman wrote on his blog.
While the IMF has advocated a slower approach to debt reduction, it urged swifter policy action, both in Europe and the United States, to remove economic uncertainty and help lift anaemic global economic growth.
The IMF meetings officially started on a regal note, with Japan's crown prince in attendance. Lagarde followed with some blunt warnings for the Fund's 188 member countries that they were losing momentum in reforming the global financial system, a running message from the IMF in the build up to the meeting.
She said it was not much safer than in 2008, when the collapse of Lehman Brothers triggered a global meltdown.
The IMF lowered its global growth forecast this week for the second time since April. Host Japan offered another reminder on Friday that its own economy was losing steam as the government downgraded its forecast for a third straight month.
In Europe, the IMF wants to see more progress toward promised reforms that would create a tighter fiscal and banking union. In the United States, the IMF has sounded the alarm over the "fiscal cliff" of automatic spending cuts and tax increases that take effect early next year unless Congress acts.
European officials insist they are on track to deliver reforms, and want to see closer scrutiny of the U.S. fiscal issues instead. U.S. Treasury Secretary Timothy Geithner said Washington has a window of opportunity to address the fiscal cliff after the Nov. 6 presidential election.
Both topics are on the agenda, along with the IMF's own internal reform efforts, which have stalled.
The Fund was supposed to have completed by the Tokyo meetings a set of voting reforms that would give fast-growing emerging markets greater say in the international lender and vault China to the No. 3 spot.
But U.S. presidential politics got in the way. The Obama administration is reluctant to seek congressional approval for additional IMF funding when the budget deficit is such a hot-button election issue. Without U.S. support, the IMF reforms lack sufficient votes to pass.
(Reporting by Reuters IMF team; Writing by Emily Kaiser; Editing by Tim Ahmann and Neil Fullick)
Keywords: IMF ECONOMY/