IMF Executive Warns of Eurozone ‘Spiral’ That Could Spark Global ‘Catastrophe’

Tuesday, 17 Jan 2012 06:56 AM

A senior International Monetary Fund executive has warned that Europe required bold
action to avert a “downward spiral” that could drag the world economy
into “catastrophe.”

IMF First Deputy Managing Director David Lipton, in his first major speech
since his appointment late last year, told a meeting of Asian finance and
banking chiefs in Hong Kong that the world economy was in trouble.

“At the global level, the pace of economic activity is weakening, and the
risks for Europe and the world are high,” he told the Asian Financial
Forum.

“Rather than allow ourselves to be paralyzed by pessimism, it is time to focus on the
more hopeful perspective of working our way through this crisis.”

His comments came after U.S.-based ratings agency Standard and Poor’s last week
downgraded the sovereign debt ratings of nine eurozone countries including
top-rated France and Austria.

The move will increase the affected countries’ borrowing costs and could lead
to a similar downgrades of the European Financial Stability Facility, the
eurozone’s bailout fund.

Lipton said the “good news” is that “we know what policies are
needed, and we are busy trying to muster the finance to support those policies.”

But without bold and concerted international action, “Europe could be
swept into a downward spiral of collapsing confidence, stagnant growth, and
fewer jobs,” he said.

“And in today’s interconnected global economy, no country and no region
would be immune from that catastrophe. This is especially true for Asia,”
Lipton added.

Asia’s relatively strong economies have already been hit by the fallout from
Europe, with export markets drying up and higher capital reserve requirements
forcing European banks to sell assets and pull cash out of emerging markets.

But Lipton said Asia had learned from its own financial crisis in the late
1990s, when the IMF bailed out Indonesia, South Korea and Thailand.

“Now it is problems in the rest of the world, Europe in particular, that
pose a risk to Asian prosperity. Now, Asia has a stake in seeing Europe solve
its problems and even in playing a role in that process,” he said.

Lipton urged Asian countries to pause monetary tightening where inflation was
under control, ensure liquidity in the banking sector, lengthen debt maturities
and expand currency swap arrangements to oil the wheels of credit.