An earlier than expected exit from stimulus by the US Federal Reserve risks reigniting the Eurozone debt crisis and pushing the weakest countries into a "debt-deflation spiral", the International Monetary Fund has warned.
The IMF also called on the European Central Bank to launch a
fresh round of unconventional monetary support.
"The macroeconomic environment continues to
deteriorate," the IMF said in its annual `Article IV' health check on the
The fund does not see a recovery until 2014, despite the recent
upbeat purchasing managers' surveys in the euro zone that offered
a glimmer of hope the bloc can return to growth soon, Reuters
It predicted that the Eurozone’s GDP will contract by 0.6% this
year, before expanding by 0.9% in 2014.
The IMF report praised Eurozone authorities for measures to
stabilize financial markets, which reduced the risk of a
Despite that , "growth remains elusive and high unemployment
persists, especially among youth," the IMF notes.
It warns that the onset of a new tightening cycle in the US
has already led to major spill-over effects in the eurozone,
pushing up bond yields across the board, the Telegraph quotes the
Early tapering by the Fed "could lead to additional, and
unhelpful, pro-cyclical increases in borrowing costs within the
euro area. This could further complicate the conduct of monetary
policy and potentially damage area-wide demand and growth.
Financial market stresses could also quickly reignite," the
newspaper quotes the fund.
The IMF explains how the ECB should act to help growth with
measures to reduce financial market "fragmentation" - a code word
for highly disparate credit rates for companies in the north and
the south of the euro zone.
"Additional unconventional monetary support could help reverse
fragmentation," the IMF said.
The Fund also called for more reforms in the banking sector,
including the re-capitalisation of weak, but viable banks, and
the closure of "non-viable" banks. It says, the
individual euro zone governments must continue with reforms and
the euro zone as a whole must go ahead with its plans to create a
banking union, Reuters quotes the IMF “Article IV”.