The International Monetary Fund (IMF) said it was ready to “strongly support” European nations in their efforts to resolve the region’s sovereign debt crisis.
Euro area countries will do whatever is necessary to end the crisis and ensure the financial stability of the entire euro area and its members, the fund said in a statement after its meetings in Washington today. Advanced nations are at the “core” of a resolution to the current global uncertainty and should adopt policies to improve their finances, it said. As Greece’s prospects darken and the 18-month debt crisis threatens to tip Europe and the global economy back into recession, the euro area’s managers are stepping up efforts to identify measures that can stop it from spreading.
Commodities fell to a nine-month low and emerging market stocks dropped the most in three years on concern the global economy is losing momentum and policy makers will fail to spur growth.
“The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike,” the fund said. “We are encouraged by the determination of our euro area colleagues to do what is needed to resolve the euro area crisis. We welcome that the IMF stands ready to strongly support this effort as part of its global role.”
European efforts will include implementing the decision to increase the flexibility of the European Financial Stability Facility (EFSF), maximising its impact, and improving euro area crisis management and governance, the fund said.
‘Strong Capital Positions’
“Advanced economies will ensure that banks have strong capital positions and access to adequate funding,” the statement said. They will also “maintain accommodative monetary policies as long as this is consistent with price stability, bearing in mind international spillovers; revive weak housing markets and repair household balance sheets; and undertake structural reforms to boost jobs and the medium-term growth potential of their economies.”
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The IMF cut its forecast for global economic growth this month and predicted “severe” repercussions if Europe fails to contain its debt crisis or if US policymakers reach an impasse over a fiscal plan. The world economy will expand four per cent this year and next, the IMF had said on September 20, compared with June forecasts of 4.3 per cent in 2011 and of 4.5 per cent in 2012.
The worsening European debt crisis and threat of a U.S. recession have erased about $12 trillion from global equities since the beginning of May. Central banks around the world have slashed interest rates to record lows and embarked on bond purchase programs, trying to kick-start the economy.
Europe ‘Epicenter’
Europe is at the “epicenter” of the sovereign debt crisis and problems in the region will affect “all of us,” Tharman Shanmugaratnam, chairman of the IMF’s steering committee, told reporters today.
U.S. Treasury Secretary Timothy F. Geithner demanded European policy makers intensify efforts to neuter the 18-month sovereign debt crisis or trigger the “threat of cascading default, bank runs and catastrophic risk.” Bank of Canada Governor Mark Carney said Europe should make available about 1 trillion euros ($1.35 trillion) to “overwhelm” the crisis, more than double the current rescue package.
European governments are exploring speeding the start of a permanent rescue fund for their cash-strapped economies and senior finance officials will examine next week the cost advantages of setting up the fund, known as the European Stability Mechanism, a year earlier than its currently planned July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News.
Capital Flows
Emerging-market and developing nations should rebuild “policy buffers”, contain overheating in their economies and be ready to face volatile capital flows, the IMF said.
“Surplus economies will continue to implement structural reforms to strengthen domestic demand, supported by continued efforts that achieve greater exchange rate flexibility, thereby contributing to global demand and the rebalancing of growth,” the fund in the statement.
To contact the reporter on this story: Shamim Adam in Washington at sadam2@bloomberg.net