Monday, 20 June 2011

IMF warns of increased risks to the world economy.

17 June 2011.

Problems in Greece could spread throughout the eurozone, the IMF warns .

The International Monetary Fund has warned that the risks facing the world economy have increased.

The fund said it was concerned about the continuing Greek debt crisis, the arguments over US deficit plans and the need to curb growth in Asia.

But it said it expected global growth to remain on track, though it lowered its forecasts for the US and UK.

The IMF predicted that the world economy would grow at a rate of 4.3% in 2011 and 4.5% in 2012.

The fund called for greater political leadership in dealing with the eurozone debt crisis and the budget crisis in the US.

"You cannot afford to have a world economy where these important decisions are postponed, because you're really playing with fire," said Jose Vinals, director of the IMF monetary and capital markets department.

The IMF's latest forecasts came as it updated its assessments of financial stability, country finances and the global economy. Its last review was in April.

The fund warned that the continuing Greek debt crisis could destabilize the global financial system.

Many analysts believe Greece will not be able to pay back all the money it has borrowed.

"I don't think there is a question over whether Greece is going to default, it is just a question of whether it is an orderly or disorderly one," says George Magnus, senior economic adviser at UBS.

The IMF warned that if Greece was unable to pay its debts, other countries such as Spain or Portugal may also be affected.

European banks which lent money to these countries would in turn lose out.

"In a serious market event, a shock could be transmitted beyond the eurozone", warned the IMF's financial stability report.

It called on the leaders of European governments to implement long-term policies to prevent further problems.

At the same time, the IMF warned that European banks had not yet built up sufficient capital to remain healthy in a further economic shock.

The IMF also highlighted debt problems outside the eurozone.

Japan is struggling to cut its spending in the aftermath of the earthquake and tsunami.

In the so-called "core" European countries, such as France and Germany, growth has exceeded expectations.

The IMF raised its 2011 growth forecast for Germany to 3.2% from 2.5%.

This may help to mitigate some of the problems faced by other countries in the eurozone.

Outside Europe, the fund said it expected economic growth in developing countries to remain strong.

Property prices in China and Brazil have also risen sharply posing the risk of a sharp downturn.

This, in turn, presents a risk of overheating - where economies grow too fast leading to a rapid contraction later.

"Too much capital may be moving too quickly to emerging markets," the IMF warned, pointing to higher inflation in some countries.
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