IMF cuts outlook as EU crisis ensnares emerging markets

Policy Action

The IMF said its latest estimates hinge on an assumption “that there will be sufficient policy action to allow financial conditions in the euro-area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction.”

The fund, which co-financed bailouts for Ireland and Greece, lowered its growth forecast for the euro region next year to 0.7 percent, from 0.9 percent in April, and left a forecast for a 0.3 percent contraction this year unchanged.

Italy and Spain, which has requested a bailout from euro countries to help shore up its banks, have taken important steps from fiscal consolidation to reforms of their economies, IMF chief economist Olivier Blanchard said at a press conference today in Washington.

‘Reasonable Rates’

“But they can only succeed if they can finance themselves at reasonable rates,” Blanchard said. “So long as these governments are committed to reforms, other euro members have to be willing to help so as to make the adjustment feasible.”

The IMF, in a separate report released today, said risks to the global financial system have increased since April.

“Funding conditions for many peripheral banks and firms have deteriorated” even as the European Central Bank provided lenders with ample liquidity, the IMF wrote in an update of its Global Financial Stability Report. “Interbank conditions remain strained, with very limited activity in unsecured term markets, and liquidity hoarding by core euro-area banks.”

The IMF said “there is room for monetary policy in the euro area to ease further” and repeated its call for policy makers to move toward a banking and fiscal union. The Frankfurt- based ECB could reactivate its bond-buying program, offer liquidity to banks with lower collateral requirements or start a quantitative easing program with asset purchases, the IMF said.

The U.K. economy will advance 1.4 percent next year, less than the 2 percent growth seen in April, the fund predicted in the economic outlook report.

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