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 reformfinancial system

By Anna Yukhananov and Gernot Heller

TOKYO, Oct 12 (Reuters) - Greece, Spain and the euro zone'sslow progress toward debt reform took centre stage at IMFmeetings on Friday despite Europe's best effort to remove itselffrom the spotlight.

The International Monetary Fund recommended that some ofEurope's debt-burdened countries take a bit more time to reducebudget deficits, arguing that moving too fast iscounter-productive because it hurts the economy.

The shift was welcomed by some emerging market countries aswell as long-time critics who say that the tough conditionsattached to IMF loans inflict undue economic pain and make itharder for countries to grow their way out of debt.

"We have been arguing for some time that single-minded anddraconian fiscal policies may be counterproductive and have atendency to backfire," said Brazilian Finance Minister GuidoMantega.

But Germany, Europe's largest creditor country and the keyto any lasting fiscal reforms, pushed back against that adviceand said reversing course on promised deficit reductions wouldonly weaken credibility.

Finance Minister Wolfgang Schaeuble said Europe had madeplenty of crisis-fighting progress, echoing comments from otherEuropean officials who said there should be greater attentionpaid to U.S. fiscal troubles too.

"Europe is not the source of all problems in the world," hetold reporters at a briefing on Friday.

The primary focus is on Greece, which has missed a series ofdebt reduction targets, and Spain, which is under pressure toseek a bailout as it struggles to rein in central governmentspending, get a grip on regional debts and recapitalise banks.

IMF Managing Director Christine Lagarde said on Thursdaythat both countries should be given more time to make neededfiscal adjustments.

The IMF's change of tune on the speed of budget cuts stemsfrom research it released this week showing that aggressivefiscal consolidation crimps economic growth more sharply thanpreviously thought.

Nobel prize-winning economist Paul Krugman called the IMF'snew 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, whichmeans bucking some powerful players as well as admitting thatits own analysis was flawed," Krugman wrote on his blog.


While the IMF has advocated a slower approach to debtreduction, it urged swifter policy action, both in Europe andthe United States, to remove economic uncertainty and help liftanaemic global economic growth.

The IMF meetings officially started on a regal note, withJapan's crown prince in attendance. Lagarde followed with someblunt warnings for the Fund's 188 member countries that theywere losing momentum in reforming the global financial system, arunning message from the IMF in the build up to the meeting.

She said it was not much safer than in 2008, when thecollapse of Lehman Brothers triggered a global meltdown.

The IMF lowered its global growth forecast this week for thesecond time since April. Host Japan offered another reminder onFriday that its own economy was losing steam as the governmentdowngraded its forecast for a third straight month.

In Europe, the IMF wants to see more progress towardpromised reforms that would create a tighter fiscal and bankingunion. In the United States, the IMF has sounded the alarm overthe "fiscal cliff" of automatic spending cuts and tax increasesthat take effect early next year unless Congress acts.

European officials insist they are on track to deliverreforms, and want to see closer scrutiny of the U.S. fiscalissues instead. U.S. Treasury Secretary Timothy Geithner saidWashington has a window of opportunity to address the fiscalcliff after the Nov. 6 presidential election.

Both topics are on the agenda, along with the IMF's owninternal reform efforts, which have stalled.

The Fund was supposed to have completed by the Tokyomeetings a set of voting reforms that would give fast-growingemerging markets greater say in the international lender andvault China to the No. 3 spot.

But U.S. presidential politics got in the way. The Obamaadministration is reluctant to seek congressional approval foradditional IMF funding when the budget deficit is such ahot-button election issue. Without U.S. support, the IMF reformslack sufficient votes to pass.

(Reporting by Reuters IMF team; Writing by Emily Kaiser;Editing by Tim Ahmann and Neil Fullick)

((emily.kaiser@thomsonreuters.com)(+65 6318 4763)(ReutersMessaging: emily.kaiser.reuters.com@reuters.net))

Keywords: IMF ECONOMY/