A further escalation of the euro area sovereign debt crisis could trigger a much more generalized flight from risk than observed thus far, International Monetary Fund Deputy Managing Director Naoyuki Shinohara warned on Tuesday.
"To avoid this risk, European policymakers need to pursue fiscal adjustment at the right pace" the IMF official said in a speech in Bangkok. The pace differs across countries, he added.
"The recent improvements are very fragile and, with important policy challenges that remain to be addressed, downside risks are large," he cautioned.
Shinohara also urged Europe to adopt financial reforms to stabilize the banking sector and pursue structural reforms to restore competitiveness. Further, he said the region must increase the strength of their firewall to provide an adequate backstop for the governments undertaking reforms.
In similar vein, the Organization for Economic Cooperation and Development's Secretary-General Angel Gurria said on Tuesday that Eurozone finance ministers need to boost the firepower of the European stability funds to at least one trillion euros. The chief of the Paris-based think tank pointed out that the current level of commitment to the rescue funds is insufficient to restore market confidence.
A credible financial firewall will provide governments with the breathing space they need to focus crucially on revitalizing Europe's economic growth and competitiveness, Gurria noted.
Regarding the global economy, Shinohara noted that some positive signs emerged over the recent weeks and there is some stabilization or even improvement in financial indicators, especially in the U.S. and Europe. Still, a lot more needs to be done to boost growth and repair financial systems, he said.
"The world economy has avoided extremely disruptive outcomes," Shinohara said. "But there is no room for complacency."
He also noted that the agreement on a new bailout for Greece brought some relief and it will be important to implement all the agreed steps. Citing the record public debt, high unemployment and oil price risks, Shinohara said,"We are navigating a very narrow path to full recovery, and the risk of slippage is very high."
IMF continues to expect that adverse spillovers from the euro area to other regions will remain limited for as long as the euro area crisis is contained, the official said. In Asia, the lender expects growth to regain momentum and to remain broadly in line with last year's outcome.
Shinohara urged advanced economies to press ahead with financial and structural reforms to repair the damage done by the crisis and emerging economies to stay vigilant from possible spillovers.
Asian policymakers face difficult challenges as the balance of risks remains highly uncertain and volatile, the IMF official noted. He said that reforms to enable countries to fully benefit from greater regional trade and financial integration can play an important role in making Asia more resilient to external shocks.
by RTT Staff Writer
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