Europe poses global recession threat: IMF

Tue Jan 24, 2012 2:42pm EST
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By Lesley Wroughton

WASHINGTON (Reuters) - Europe's debt crisis could tip the world economy into recession and a bigger firewall is urgently needed to keep the damage from spreading, the International Monetary Fund said on Tuesday.

The IMF chopped its estimate for 2012 global growth to 3.3 percent from 4 percent just three months ago and warned it could drop as low as 1.3 percent if Europe lets the crisis fester for much longer. For 2013, it predicted growth of 3.9 percent.

"The epicenter of the danger is Europe but the rest of the world is increasingly affected," IMF chief economist Olivier Blanchard said at a news conference. "There is an even greater danger, namely that the European crisis intensifies, and in this case the world could be plunged into another recession."

"With the right set of measures, the worst can definitively be avoided and the recovery can be put back on track," he said. "These measures can be taken, need to be taken, and need to be taken urgently."

The IMF called for swift action from the 17-nation euro zone, which it said would likely see its economy contract this year by 0.5 percent.

"The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation," it said in its latest World Economic Outlook report.

Blanchard and other top IMF officials emphasized repeatedly that Europe needs to bolster its rescue funds to win market confidence and lower yields on sovereign bonds so that countries like Italy and Spain can borrow at affordable rates.

Talks between private bond holders and the Greek government have foundered, raising the risk Athens could face a messy default that would touch off a deeper crisis. IMF Managing Director Christine Lagarde warned on Monday that a failure to erect a larger wall against financial contagion could lead to a "1930s moment."   Continued...

<p>An elderly man hugs a boy in the Andalusian capital of Seville January 18, 2012. REUTERS/Marcelo del Pozo</p>