IMF pushes for more action as Europe’s recovery drags
By Tetsushi Kajimoto and Julien Toyer, Reuters, October 10, 2012
Tokyo—The IMF prodded the world’s rich countries for swifter action on Thursday as Europe’s debt crisis drags on while the United States and Japan show scant progress handling their budget deficits.
Christine Lagarde, managing director of the International Monetary Fund, said political wrangling added to economic uncertainty, slowing growth in both advanced and emerging economies. The IMF cut its global growth forecast this week for the second time since April.
“We expect action and we expect courageous and cooperative action on the part of our members,” Lagarde told reporters ahead of the IMF’s twice-yearly meetings in Tokyo.
The slowdown has not spared emerging market economies, which were instrumental in pulling the global economy out of recession in 2009. Brazil cut interest rates on Wednesday and South Korea on Thursday.
“Developing countries, which have been the engine of growth, will not be immune the increased uncertainty in the global economy,” said World Bank President Jim Yong Kim.
“The economic announcements emanating in recent weeks have been sobering. Everyone is vulnerable in times of uncertainty but especially the poor who have few, if any, safety nets and resources and live from day to day.”
The IMF has expressed frustration with Europe’s piecemeal response to its debt crisis and warned that a recent respite in borrowing costs for debt-laden countries such as Spain may prove short-lived unless euro zone leaders come up with a comprehensive and credible plan.
In its financial stability report on Wednesday, the IMF said that without swift policy action, including the triggering of the European Central Bank’s bond-buying programme, the premium that investors demand to hold Spanish and Italian debt instead of safer German bonds would nearly double.
Standard & Poor’s cut its rating on Spain on Wednesday to a level just above junk territory, and Moody’s may soon follow.
The IMF has said it stands ready to support a European bailout for Spain, should Madrid ask. Reuters reported on Oct. 1 that Spain was ready to seek help, but that Germany was blocking an aid request because it preferred to combine a Spanish rescue with additional assistance for other struggling countries such as Greece.
Jose Vinals, the head of the IMF’s monetary and capital markets department, warned that countries must not withhold help if Spain were to ask the European Central Bank to buy its bonds under a new bailout programme, known as OMT for Outright Monetary Transaction.
“If it were to be the case that they decide to activate this mechanism and they can submit to the proper degree of conditionality, it would be essential that the creditor countries do not negate this activation of the OMT for Spain or for any of the countries,” Vinals told Reuters.
Japan’s finance minister, Koriki Jojima, called the euro zone’s debt and financial sector problems the biggest risk to the global economy and said it was crucial for Europe to quickly implement agreed steps to resolve the crisis.
But Japan also drew criticism from the IMF for failing to come up with a medium-term plan to address its own debt difficulties. In its financial stability report, the IMF said Europe’s troubles provided a “cautionary tale” for Japan that waiting to address its towering debt—estimated at more than twice its annual gross domestic product—could be costly.