THE fiscal hawks should be pleased. For all the hand-wringing about public profligacy, budget deficits across the rich world fell by about 1% of GDP last year. Moreover, that was very nearly all the result of policy actions (spending cuts and tax rises) very than cyclical effects.Germany, France, Spain and Italy all managed to reduce their structural budget deficits, the latter three thanks to austerity. All are probable to reduce those deficits further this year, the International Monetary Fund said on January 24th. But this may not be excellent news. Austerity can unnerve markets, not cool them.The IMF studied the correlation between credit-default-swap spreads and a variety of economic indicators last year. Long-run indicators—for deficits, economic growth and spending on pensions and health care—had small impact on spreads. But larger near-term fundamental deficits (which eliminate interest) were associated with notably wider spreads. So, too, was weaker current-year growth.This is surprising. In theory solvency should be a function of longer-term growth and fiscal trends, but markets instead seem to care more about the small term. Carlo Cottarelli and Laura Jaramillo of the IMF say tighter fiscal policy, by hurting the near-term growth outlook, may possibly really lead to wider, very than narrower, spreads. Cut the deficit too aggressively, in other terms, and the negative impact on…

Original post by The Economist: Business