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Fragile recovery needs deeper ties

Wednesday, October 10 07:30:26

The International Monetary Fund urged European policymakers to deepen the financial and fiscal ties within the euro area with some urgency to restore sagging confidence in the global financial system. In its semi-annual check on the world's financial health, the Fund said the euro area's debt crisis was the main threat and the risks to global financial stability had risen in the last six months, leaving confidence "very fragile".

The euro area's plodding progress means European banks are likely to offload $2.8 trillion in assets over two years to cut their risk exposure, an increase of $200 billion from a prediction six months ago, the IMF estimated. That could shrink credit supply in the periphery by 9 percent by the end of 2013, crimping economic growth. "Despite many important steps already taken by policymakers, this agenda remains critically incomplete, exposing the euro area to a downward spiral of capital flight, breakup fears and economic decline," the IMF said in its Global Financial Stability Report (GFSR) released today.

Jose Vinals, director of the IMF's monetary and capital markets department and the main author of the financial stability report, said Europe's troubles should serve as a lesson to the heavily indebted United States and Japan that delaying the necessary policy adjustments until markets force their hands would lead to "harsher economic outcomes." "We should not let the current market conditions, which have improved, lead to a false sense of security," Vinals said in a press briefing. The report adds to the gloomy backdrop ahead of the IMF's semi-annual meeting to be held in Tokyo later this week. On Tuesday, the Fund said the global economic slowdown was worsening as it cut its growth forecasts for the second time since April and warned U.S. and European policymakers that failure to fix their economic ills would prolong the slump.

Last week, Canada's Finance Minister Jim Flaherty expressed his latest sign of frustration over progress in resolving Europe's debt crisis by saying it represented a "clear and present danger". In September, the European Central Bank agreed to buy the bonds of debt-strained governments once they have signed up for a euro zone bailout programme, restoring some market confidence and narrowing the spread between core and peripheral debt in the region. But private investors still lack confidence in peripheral European markets and the difference between the yields on peripheral and core debt from banks and companies remains high, threatening any recovery, the IMF said. ( C) Reuters