Europe debt crisis raises risks, IMF warns

Europe debt crisis raises risks, IMF warns

The world economy is recovering faster than expected but Europe’s debt crisis has increased financial risks and governments urgently need to rebuild shaky public confidence, the International Monetary Fund said today.

The Washington-based IMF raised its 2010 world growth forecast to 4.5% from 4.1% in April. Its US growth forecast rose from 2.7% to 3.3%. The outlook for the European nations that use the euro common currency was unchanged at 1%.

But in its quarterly World Economic Outlook, the IMF warned that “risks have risen sharply” due to Europe’s financial turbulence. It said European leaders needed to act quickly to resolve debt problems and restore confidence in their banks.

Europe’s debt risks were “threatening to spill over to other regions” and reverse recent gains, the agency said in a separate Global Financial Stability Report.

Global economic indicators stabilised at a high level in May, with industrial output and trade posting double-digit growth, the agency said. It said there was a modest but steady recovery in developed economies and strong growth in emerging nations.

Asian economies recovered strongly this year, driven by buoyant exports and stronger domestic demand, the IMF said.

The agency raised its 2010 growth forecast for China to 10.5% from 10% in April, for Japan to 2.4% from 1.9% and for India to 9.4% from 8.8%. The estimate of the region’s growth rose to 7.5% from 7%.

But it warned that any slackening in Europe’s recovery “would affect Asia through both trade and financial channels.”

Weak data from major economies in recent weeks have diminished confidence in a strong rebound from last year’s recession.

The IMF said European leaders must act quickly to rebuild confidence. It said they must resolve uncertainty about banks’ exposure to government debt and other risks and make sure lenders have enough capital and markets have adequate liquidity.

It said many advanced economies urgently needed to push ahead with financial system reforms including recapitalising banks, restructuring and consolidating banking industries and overhauling regulation.

“In the absence of complete banking sector recapitalisation and restructuring, the flow of credit to the economy will continue to be impaired,” the IMF said.

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