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Posted at 3:00 AM ET, 01/25/2011

IMF: Europe poses the key risk to global economy

By Howard Schneider

Europe needs to increase the size of its economic rescue fund and take more decisive action to fix its weaker banks, the International Monetary Fund said Tuesday in a new report that cites lingering problems in Europe as the key risk to the global economy.

The 17 nations that share the Euro as a currency pledged roughly $600 billion to assure global markets that troubled countries such as Greece and Ireland would pay their bills. But to assure the fund's credit rating remains high, only about half of that money is actually available -- meaning the fund could, as a practical matter, be tapped out if another country such as Portugal or Spain needs help.

So far, key European nations such as Germany have opposed any increase, arguing that they will bear the brunt of financing more bailouts and don't want to risk their own nation's credit standing.

But on Tuesday the IMF urged Europe to both increase the amount of money available and expand what can be done with it to assure that both European governments and national banking systems remain well-funded. The danger of another Europe-driven crisis remains high, the IMF said, and European leaders have yet to convince markets that they can avoid a national default or major bank failure.

Bank stress tests conducted last summer have been largely discounted. More tests are to be conducted this summer, but Europe needs to ensure that an adequate plan is in place to pump more capital into weak banks or, if necessary, put some out of business.

The rescue fund "should be increased and it should have a more flexible mandate," the IMF said.

In its latest update on the global economy, the IMF said the recovery remained on track and had accelerated slightly at the end of 2010. Overall, the world economy is expected to expand by about 4.4 percent in 2011, but at "two speeds." Advanced economies are projected to grow around 2.5 percent, while emerging and less developed countries are expected to expand by around 6.5 percent.

The gap between the two carries its own set of risks: Growth is too slow in the developed world to bring down high unemployment, while emerging market economies are beginning to face inflation and rising asset values because of the rapid growth.

But it was Europe that still poses the most acute risk, with banking and government debt problems now closely entwined and with markets unconvinced that officials will adequately address either problem.

"Comprehensive, rapid and decisive policy actions are required," the fund said.

By Howard Schneider  | January 25, 2011; 3:00 AM ET
Categories:  International Economics, International Monetary Fund  
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Next: Economic agenda: Tuesday, Jan. 25, 2011

Comments

I so dislike these elites of the world that want to keep engineering societies and country's economies!

They think have all the answers, well they have not done such a great job. Britain keeps losing jobs to China and other countries just like we do!

My hope is all these elite organizations will fade away!

Posted by: Anonymous | January 25, 2011 8:39 AM | Report abuse

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