May 12, 2011
The International Monetary Fund has warned that the eurozone debt crisis could spread across the region unless European countries step up efforts to fix their banks.
In its latest economic outlook for Europe, the IMF said that the debt crisis in Greece, Portugal and Ireland could hit the wider eurozone by hitting bank lending and delivering a confidence shock, despite the rescue packages that are already in place.
"Financial linkages between countries with sovereign debt troubles and the rest of Europe could potentially pose more risk to the outlook," the IMF said on Thursday. "Restoring fiscal health, squarely addressing weak banks, and implementing structural reforms to restore competitiveness are key."
The Washington-based organisation stressed the importance of stress tests on banks, saying they are a key opportunity to force those found to be weak to raise new capital to bolster their finances. The European banking regulator is busy running a new round of stress tests and will publish the results in June. Tests conducted last year were regarded as too easy.
The IMF estimates that the eurozone will grow by 1.7% this year, the same as in 2010, and 1.9% next year, assuming debt crises don't derail the economy.
It also expressed concern about Britain's economic position. The UK faces "considerable short-term uncertainty, as growth turned flat in late 2010 - taking out temporary weather-related effects - and fiscal consolidation accelerates," said the IMF.
However, the drop in sterling and low interest rates should help mitigate the effects of the "sizeable" government spending cuts, it added.
The report was issued just hours after Finland agreed to support a rescue package for Portugal. The Finnish finance minister said that Finland was prepared to sanction the €78bn (£67bn) aid deal, as long as Portugal started negotiations to persuade private investors to keep their funds in the country.
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