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IMF chief warns of 'dangerous new phase' for world economy

Sandrine Rastello and Simon Kennedy

Published 29/08/2011 | 05:00

Christine Lagarde, managing director of the International Monetary Fund
Christine Lagarde, managing director of the International Monetary Fund

Europe's banks should be forced to raise capital to protect themselves from the debt crisis as the world economy enters a "dangerous new phase", the head of the IMF said at the weekend.

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Christine Lagarde, managing director of the IMF, warned officials must take new steps to strengthen growth.

Ms Lagarde, speaking to international finance officials and economists in Jackson Hole, Wyoming, said the US should arrest a slide in house prices and European banks must be required to boost capital to prevent the continent's debt crisis from infecting more countries.

The US and EU should enforce long-term budget discipline to free up cash for short- term stimulus, she said. "We risk seeing the fragile recovery derailed. So we must act now."

Ms Lagarde (55) spoke near the end of a month when the value of global equities dropped by $5.7trillion (€3.9tn) on concern global growth is slowing and governments will be unable to tackle sovereign debt burdens.

UBS and Citigroup cut their forecasts for expansion of the world economy and predicted central banks will leave interest rates on hold through 2012.

"Risks have been aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed," Ms Lagarde said.

The slowdown provided the impetus for three days of debate at the conference, with Federal Reserve chairman Ben Bernanke saying the US central bank still has tools to boost its economy, without specifying what they were or whether they would be deployed.

Irish Independent

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