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IMF Urges Euro Zone Action to Avoid Global Contagion

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The International Monetary Fund warned on Tuesday that Europe's debt crisis could have a major global impact if not tackled quickly and it urged euro zone leaders to beef up the region's rescue fund and recapitalise its banks. Two days before leaders of the 17-nation bloc are due to gather in Brussels for emergency talks in a bid to draw a line under Greece's spiralling debt crisis, the IMF urged them to take quick action to overhaul the European Financial Stability Facility (EFSF) set up to bail out debt-burdened economies. "It would be very costly not just for the euro zone but for the global economy to delay tackling the sovereign crisis," Luc Everaert, Division Chief for Euro Area Policies in the IMF's European Department, told a conference call. The Fund recommended the EFSF, which has an effective lending capacity of 440 billion euros, be increased in size and be allowed to purchase sovereign debt on the secondary bond market, permitting it to participate in a possible debt buyback currently under discussion. European officials are considering three options for private sector involvement in a second Greek bailout, including the repurchase of sovereign debt on the market, a tax on the financial sector, or the rollover of bonds. While the IMF said private sector participation in euro zone bailouts was essential, Fund officials declined to say which if any of these options was preferable. With interlinkages in the financial sector providing the main threat of contagion, the Fund called for the EFSF to be reformed to act as a backstop for weak European banks, an option which euro zone leaders have so far resisted. Need More Europe, Not Less In a "spillover" report on the effects of euro zone policies on other major economies, the IMF said recapitalising banks was key to prevent the crisis spreading from peripheral countries to the core of the region, France and Germany, and beyond. The impact from euro area banks would be strongest in Britain, Hungary, Russia and Turkey followed by Brazil and the United States, it warned. Banks throughout the euro zone immediately required more and higher quality capital. The Fund urged capital raising and restructuring of weak institutions, and urged reforms to make cross-border mergers and acquisitions easier. Shunned by markets and battling with deposit withdrawals, banks in Greece, Portugal and Ireland survive only because of emergency liquidity from the European Central Bank, it said. "European banks need to be strengthened throughout the euro-zone area with a very strong follow-up to the stress tests that just came out and with a preference for private sector solutions," Everaert said. The European Banking Authority said on Friday that eight banks failed its tests, with a total capital shortfall of just 2.5 billion euros. But the test of 90 big lenders was widely criticised for being too lenient and turned up the market heat on many banks which scraped through. The Fund said the crisis had shown the need for the euro zone to press ahead with reforms to create an effective single market and to adopt tougher controls on member state's deficits. "We need more Europe not less," Everaert said. "It's not necessary to go to full fiscal federalism, just need a mechanism which can override some national decisions to ensure fiscal discipline." While the euro zone's economic recovery appeared resilient thanks to growth in core, northern European economies, the Fund noted that the downside risks from the debt crisis were very important. It confirmed its growth forecasts of 2.0 percent for this year and 1.7 percent for 2012. (Reuters)