The International Monetary Fund (IMF) has told some of the world's largest economies to implement deficit cutting plans or risk a repeat of the sovereign debt crisis that has engulfed Greece and Ireland.
The warning came on Thursday as ratings agency Standard & Poor's cut Japan's long-term sovereign debt rating for the first time since 2002, saying Tokyo lacked a plan to deal with its debt.
The IMF said Japan, America, Brazil and many other indebted countries should agree targets for bringing borrowing under control. It said the pace of deficit reduction across the advanced economies was likely to slow this year, mainly because the US and Japan are preparing to increase their borrowing.
"In advanced economies where fiscal sustainability has not been a market concern, credible plans going well beyond 2011 need to be put in place urgently to lock in benevolent market sentiment," the IMF said in its Fiscal Monitor report.
The downgrade of Japan's rating shook world stock markets and sent the euro higher as investors sold the yen. The euro traded up 1% against the yen at 113.76.
Japan's annual fiscal deficit is forecast to fall modestly from 9.1% of national income in 2010 to 8% in 2013. Its cumulative national debt is nearly 200% of GDP. The IMF welcomed Europe's austerity measures, though it said a more comprehensive approach to crisis management was needed to avoid spillovers and to "break the fiscal-financial spiral".
Greece, Italy and Belgium have the highest debt levels in Europe.