Bloomberg News

IMF Says Crisis May Overwhelm Favorable Euro-Area Outlook

June 20, 2011

(Updates with additional comment in fifth paragraph.)

June 20 (Bloomberg) -- The International Monetary Fund warned that Europe’s debt crisis has the potential to crush the otherwise positive economic outlook for the region unless policy makers step up efforts to resolve it.

“A broadly sound recovery continues, but the sovereign crisis in the periphery threatens to overwhelm this favorable outlook, and much remains to be done to secure a dynamic and resilient monetary union,” the Washington-based fund said in its concluding statement on euro-area policies today. “Failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers.”

The fund said policy makers should scale up Europe’s rescue fund and extend its potential uses “to secondary market purposes and term funding guarantees.” That echoes proposals by the European Central Bank, which wants the rescue fund to purchase government bonds in the secondary market.

European finance ministers said last night further aid for Greece, which needs a second bailout, hinged on embattled Prime Minister George Papandreou delivering budget cuts in the face of domestic opposition. Ireland and Portugal followed Greece in obtaining emergency loans in the past year.

The IMF said policies “‘to stop contagion from sovereign- debt adjustment or re-profiling are at a premium.’’

Spain, Italy

Spain’s finances came under the microscope last week, with investors pushing the extra yield on 10-year Spanish bonds over German bunds to as much as 282 basis points, close to a record reached in November. The premium was at 265 basis points today.

Moody’s Investors Service said June 17 it may cut its Aa2 rating on Italy, whose 2010 debt amounted to 119 percent of gross domestic product, Europe’s second highest after Greece.

The IMF said Europe needs a signal that member countries ‘‘will do whatever it takes to safeguard the stability of the euro area” and called on policy makers to “bring the unproductive debate about debt re-profiling or restructuring to closure quickly.”

The fund raised its 2011 growth forecast for the euro area by 0.4 percentage point to 2 percent on June 17 in an update of its April projections. For 2012, it cut its estimate by 0.1 percentage point to 1.7 percent.

The fund also advised the ECB, which is poised to raise interest rates again in July, to normalize policy only “gradually.” Moving cautiously will help “limit stress from higher interest rates that could be felt in the periphery,” it said.

--Editors: Matthew Brockett, Fergal O’Brien

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net


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