Global Economic Outlook IMF: Europe needs to wean banks off crisis support

By Pan Pylas

AP Business Writer

LONDON (AP) -- Europe needs to do more to wean its banks off crisis support measures or risk more financial turmoil and a prolonged period of weak growth, the International Monetary Fund said Wednesday.

In its half-yearly World Economic Outlook, the IMF said Europe's banks are still overly reliant on help from governments and the European Central Bank, and remain highly vulnerable to any slowdown in economic growth, another outbreak of the government debt crisis and funding constraints.

"If unaddressed, renewed financial sector stress could spread and could have significant adverse effects on real activity," the IMF said.

The Fund said this summer's stress tests into 91 banks across the EU were "helpful" in improving disclosure regarding their financial resilience following the government debt crisis that nearly pushed Greece into bankruptcy and raised real questions about the future of the euro currency itself.

It said the tests highlighted how some of Europe's banks may need to raise more capital, while others will have to restructure, adding that some countries, such as Ireland and Spain, have made more progress than others, like Germany, in dealing with weak banks.

Because risks remain, the IMF said some blanket financial support measures will need to be extended, though it stressed that should not be at the cost of postponing "much-needed" restructuring, increasing banks' willingness to supply credit and reforming the regulatory backdrop.

Despite warning about the banking system's dependence on emergency support measures, the IMF heaped praised on the European authorities for moderating the impact of the sovereign debt crisis that broke out in the spring of this year.

It said governments across the single currency zone should use the current "window of opportunity" afforded by the "strong and far-reaching policy response" to get their public finances into shape and tackle weak banks.

If they fail to do so, then they are consigning themselves to the prospect of "a protracted period of subpar growth and occasional crises."

Nevertheless, the response to the crisis, including unprecedented liquidity and credit support, has helped the recovery in the 16 countries that use the euro gain traction over the summer months.

The IMF expects the eurozone to grow by 1.7 percent this year, a full percentage point more that its expectation in July, and by 1.5 percent in 2011, 0.2 percent more than the previous forecast.

Despite that overall improvement, there are pronounced differences in the IMF's forecasts among the member states, with Germany growing a massive 3.3 percent this year, in contrast to Greece's expected 4 percent contraction.

The fund said growth in Germany is likely to moderate in the second half of the year from the boom levels recorded in the first half largely because of weak growth among its trading partners, such as France, where private consumption is being weakened by high unemployment and the government's withdrawal of stimulus measures.

Beyond the eurozone in Europe, the prospects for recovery are similarly uneven, the IMF said, with Britain growing by only 1.7 percent this year and 2 percent next as the government cuts spending to reduce the budget deficit.

In the emerging countries of eastern Europe, the IMF said those that experienced the mildest downturns, such as Poland, are expected to continue to outperform those that experienced unsustainable domestic booms, such as Bulgaria and Latvia, or have big debt problems, like Hungary and Romania.

Published: Thu, Oct 7, 2010

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