In partnership with

IMF: Europe must restore confidence

Oct 10 2012 10:47

Flags of the EU member states fly outside the European Parliament in Brussels. (AFP, File)

Related Articles

IMF cuts growth forecast for SA

IMF: Crisis to last 10 years

IMF warns of global economic slowdown


Tokyo - Europe must do more to tackle its fiscal crisis, which is heaping extra pressure on an already-strained global financial system, the International Monetary Fund warned in a new report on Wednesday.

Despite some new policy measures, among them a bond-buying programme aimed at helping debt-riddled nations tame their borrowing costs, the risks of a world credit crunch and recession loom, the IMF said.

"(European) policymakers need to take additional measures to restore confidence," said the Fund's Global Financial Stability Report ahead of its annual meeting this week in Tokyo and a day after cutting its global growth forecasts.

"Risks to global financial stability have increased and financial markets have been volatile as European policymakers grapple with the ongoing crisis," it added.

The report comes a week after IMF head Christine Lagarde urged eurozone leaders to move fast to resolve the bloc's debt crisis. "No one has the luxury of time, this is really urgent," she told the French daily Le Figaro.

"The cost of solutions increases as time passes," she added.

The European Central Bank last month announced a programme to buy the government bonds of debt-ridden eurozone nations under strict conditions but it remains unclear whether troubled countries, notably Spain, will accept the offer.

"If there is no demand and if this is related to domestic political considerations, that would be unfortunate," Jose Vinals, director of the IMF's monetary and capital markets department, told a news briefing in Tokyo as the report was released Wednesday.

The eurozone launched Monday its much-awaited €500bn European Stability Mechanism rescue fund, which is seen as a major step in the bloc's defences against a debt crisis that has pushed it back into recession.

"(It) gives a lot of comfort that the size of the firewall has become sufficiently flexible and that makes a big difference," Vinals said.

The report's recommendations include cutting public debt and deficits "in a way that supports growth" and a "clean-up of the banking sector, including recapitalising or restructuring viable banks and resolving nonviable ones".

It also warned that a "further deterioration in the euro area crisis is the biggest risk to global financial stability, but rising imbalances elsewhere are also a cause for concern".

The United States and Japan both face looming fiscal hurdles, which, if not cleared, could upset the world financial system, the report said.

"Both countries require medium-term deficit reduction plans that protect growth and reassure financial markets," it said.

Emerging economies have fared relatively well through the several tumultuous years of global economic uncertainty, but they "need to guard against potential shockwaves from the euro area crisis, while managing slowing growth in their own economies".

On Tuesday, the IMF's added to concerns about the health of the global economy, warning of a possible recession and cutting back its growth forecast for this year to 3.3%, from July's estimate of 3.5%.

Growth will only hit 3.6% next year - lower than the 3.9% predicted in July - as even powerful emerging economies like China, India and Brazil hit the brakes, the Fund said.

But those assumptions are based on Europe's leaders tackling the debt crisis and US politicians backing off harsh spending cuts and tax hikes slated for January 2013.

"Failure to act on either issue would make growth prospects far worse," the Fund said in the World Economic Outlook report.

* Follow Fin24 on Twitter and Facebook.

imf  |  europe debt crisis  |  global economy



Read Fin24’s Comments Policy publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Company Snapshot

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...

Voting Booth

The SARB’s Monetary Policy Committee will decide on the next move in interest rates tomorrow will they?

Previous results · Suggest a vote