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IMF urges EU to solve debt problems

Sao Paulo - "Policymakers must act now to make the financial system more robust," the IMF said in a report issued in Sao Paulo.

"The current window of opportunity to prepare the financial and economic system against potential systemic shocks, importantly by providing clarity on euro area-wide solutions to strains in the periphery, could close unexpectedly."

The fund noted that concerns about debt sustainability and support for adjustment efforts in the eurozone periphery had intensified, in an update of its April Global Financial Stability Report.

"Credit default swap spreads have risen to new highs in Greece amid concerns over the degree of political resolve that will be needed to implement adjustment and secure needed funding."

The IMF highlighted that worries about the bailed-out eurozone periphery economies of Greece, Ireland and Portugal have renewed the market’s focus on the potential for contagion of shocks to banks.

Banking systems in core European countries, such as Germany and France, still have large exposure to peripheral countries, and the pace of banking system repair has been too slow, it warned.

A market shock could come from an un unexpected sudden pickup in risk aversion that "leads market participants to narrow their tolerance for incomplete policy solutions".

"It could also be closed by political developments, either because adjustment programmes lose political support in debtor countries, or because populaces in creditor countries lose patience in continuing to finance those programs," the Washington-based institution said.

"Thus, a more robust financial system, notably in Europe, is needed to gird against shocks."

 
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