As debt crisis rumbles on, IMF warns euro zone that time is running out


ANALYSIS:TIME IS running out for the euro zone and “bold political leadership” is needed to end the debt crisis, according to the International Monetary Fund.

Launching its bi-annual assessment of the state of the global economy, the IMF said downside risks had increased since its last assessment in April.

It identified Europe as the main source of risk. If either Spain or Italy became unable to borrow in capital markets, the effect could “easily derail the global economy”.

Although it welcomed the agreement among euro zone leaders, reached on June 29th, to allow bailout funds to be invested directly into national banks, the IMF said more needed to be done.

It said consideration should be given to the issuing of eurobonds and the resumption of the European Central Bank’s programme of buying the bonds of weak governments to provide a backstop.

The IMF has consistently urged euro zone leaders to move towards a banking and fiscal union so that the currency union is made sustainable. It repeated those calls yesterday with more urgency.

The second major risk to the world economy comes from the US. Early next year US public debt will hit a ceiling set down in law. If Congress does not vote to raise it, there is a risk of the US defaulting on its sovereign debt.

Last year Congress waited until the last moment to raise the ceiling, leading to concerns that the world’s largest economy would default.

Despite its gloomier assessment, the fund made only minor revisions to its economic forecasts for the largest economies.

It believes the euro zone economy will contract by 0.3 per cent this year, unchanged on its last forecast. The main reason for not changing the forecast, an IMF staffer said, was that the original projection was already low and the out-turn in the first quarter of the year was better than expected.

The headline rate, however, masks a large north/south gap in economic performance in the euro zone. IMF economists forecast deep recessions in both Spain and Italy, with sharp contractions in output this year and milder declines next year. By contrast, they expect the German economy to expand by 1 per cent this year before an acceleration to 1.4 per cent in 2013.

Among Ireland’s main trading partners outside the euro zone, the UK economy was subject to the largest revision. In April, the IMF expected GDP growth in Britain this year of 0.8 per cent. It has cut that forecast sharply to just 0.2 per cent.

The IMF shaved one-tenth of a percentage point off 2012 growth in the US. Although at 2 per cent, it is expected to be much stronger than euro zone growth.

Despite growing concerns about a slowdown in China, the world’s third-largest national economy, the IMF expects a rate of growth of 8 per cent this year, a mere 0.2 percentage points lower than its April forecast.

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