The Fund painted a grim picture of countries trying to balance the risk of a "prolonged depression and stagnation" against a "loss of confidence in government solvency."
While spending was needed now to prevent the economic situation from deteriorating dramatically, too much could shake investors' faith in government debt, raising borrowing costs.
"Balancing these risks will be challenging but the trade-off can be improved if governments clarify, in a credible way, their strategy to ensure fiscal solvency," the IMF wrote in a paper released as part of its advice to finance leaders from the Group of 20 rich and developing nations, who are meeting next week.
0:00/3:16Stimulus or bust"Indeed, greater clarity is urgently needed. The problem cannot simply be ignored."
Rising government debt from the current crisis was not particularly risky on its own, but countries must ensure that the added spending was temporary, the IMF said. It pointed out that many major countries were coping with aging populations that would soon put a greater burden on public finances.
On average, G20 countries were planning stimulus measures amounting to 1.5% of gross domestic product in 2009, and 1% in 2010, the IMF estimated.
"Risks (to the economic forecast) appear clearly weighted on the downside," the IMF said. "Thus, further fiscal policy support may be needed."
While the IMF said higher spending was warranted to combat a deepening recession, deteriorating government finances raised "issues of fiscal solvency and could eventually trigger adverse market reactions."
In particular, they warned that higher borrowing costs could add to government debts, "in some cases resulting in 'snowballing' debt dynamics."
"This scenario would be deleterious for global growth."
On a somewhat brighter note, the IMF said so far, investors' confidence in governments' solvency had been a source of stability, and had helped to avoid "a complete meltdown of financial markets."
The coming deficit reckoning
As economy falls, more people put money away in savings
