IMF warns of eurozone debt crisis spillover

THE IMF has warned that the debt crisis in Ireland, Greece and Portugal, despite the current support programmes, remains a risk, and could spill over to the rest of the world.

They praised the steps being taken by Ireland. According to IMF European director Antonio Borges “Ireland is doing very well”.

But the Washington- based body involved in the rescue packages for the three peripheral countries warned the EU to stop talking about debt restructuring, which threatens to trigger a default for Greece.

This would result in a crisis for the banks in the core of the euro area, which would mean the crisis would be felt much more strongly around the world as a result.

The IMF warned that making financial support dependent on debt restructuring — as envisaged in the new European Stability Mechanism to be introduced in mid-2013 — must be dumped.

“The crisis has brought the euro area to a crossroads — and the management of the ongoing sovereign debt problems in several countries is a key element in this,” said acting IMF managing director John Lipsky.

He called for a more co-operative approach with the programme countries pushing through their reforms and the euro area providing financial support under the right conditions to foster success.

Rather than the current “them and us” scenario, the IMF suggested that the union must push ahead with greater economic integration to achieve growth and instead of focusing on national priorities, complete the single market.

“Labour and equity capital have to flow freely across borders to wherever they are needed most to unleash Europe’s growth potential and create new jobs. Opening capital markets, not only for banks, is particularly important in this respect,” said Mr Lipsky.

On the financial sector he said that the bank stress tests should lead to a strengthening of the capital positions of euro area markets. But market based solutions to add capital should dominate.

“Why not foster cross-border takeovers? Why not focus on the development of corporate bond markets and re-establish high quality securitisation to support firms while banks adapt to the new regulatory environment,” Mr Lipsky asked.

But all this needs stronger common rules and more intrusive governance of member states’ economies, he warned. The IMF backed giving greater powers to the European Commission to impose automatic sanctions against governments that breach budget rules.

There should be strong common rules for regulation and supervision, sufficiently flexible to deal with macro-prudential risks, co-ordinated by the European Systemic Risk Board.

Mr Lipsky, who took over when Dominique Strauss-Kahn resigned, has taken a much tougher attitude than his predecessor with the EU and is credited with pushing Germany to agree to a new loan package for Greece and getting them to back down from their demand for private sector involvement.