FT Alphaville reporting:

Christine Lagarde has urged countries to put a brake on austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth. Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday.

The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity.

As the FT’s Izabella Kaminska put it, the IMF “has played bad cop” to emerging market overindebted economies for a very long time. And in a previous article on FT Alphaville this week she placed the spotlight on the IMF’s change of heart regarding the critical question of the strength of the fiscal multiplier effect, which is economics lingo for “how much economic damage will be caused by shock-therapy austerity measures?”

What is the basis for this change of heart by the IMF? Perhaps, the kind of bitter medicine which is the stock in trade of the IMF only ever worked where and when it was (i) offset by exchange rate adjustment and (ii) there was “growth elsewhere”. The Eurozone members are locked inside the straitjacket of the Euro. There is no growth elsewhere. So what used to work, before and elsewhere, does not work here and now in the embattled periphery of the Eurozone.

Moreover, the entire Eurozone banking system is arguably insolvent with any honest valuations of Bank assets, which means that the banks are also furiously attempting to deleverage alongside households, firms and sovereigns. Deflation, disinvestment, deposit flight and depression are the obvious, predictable outcomes for the EZ periphery economies which appear to be locked into death spirals with no obvious way out.

Put another way – if IMF Managing Director Christine Lagarde is worried about growth enough to be willing to throw decades of IMF dogma out of the window, the rest of us should be panicking.