EUROPE must shore up its €440bn bailout fund to stop Ireland and Greece's sovereign debt problems spreading to other countries with devastating effects for the rest of the world's economy, the IMF said yesterday.
In an update to its Global Financial Stability Report, the IMF said the effective size of Europe's financial rescue fund should be increased and have a more flexible mandate.
Stress tests on the region's banks should also be "more realistic, thorough and stringent" than the ones conducted by European authorities so far.
"Problems in Greece, and now Ireland, have reignited questions about sovereign debt sustainability and banking sector health in a broader set of euro area countries and possibly beyond," the IMF said as it released two reports on the global economy.
The IMF warned that global financial stability is not assured yet, with the interaction between banking and sovereign credit risks in the 17-country euro region remaining "a critical factor".
"Concerns about banking sector losses and fiscal sustainability -- triggered this time by the situation in Ireland -- led to widening spreads in these countries, in some cases reaching highs not seen since the launch of the European Economic and Monetary Union," the IMF said.
The European Central Bank (ECB) "will need to continue to supply liquidity to banks that need it" and keep its temporary bond-buying programme active, IMF spokesman Olivier Blanchard said in comments that will be music to the ears of most Irish bankers and central bankers.
No banks in Europe are more dependent on ECB lending than Ireland's.
Assuming the European debt crisis does not spread, the IMF sees global growth of 4.4pc this year and 4.5pc next year. The eurozone is seen growing much more slowly; expanding just 1.5pc this year and 1.7pc next year.
The IMF did not give a forecast for Ireland yesterday but said last month that it expects the Irish economy to grow 0.9pc this year and 1.9pc in 2012.
"The world economy is recovering, but it is a two-speed recovery," Mr Blanchard said.
"Our forecast is that next year growth will be roughly the same as this year. That's not going to be able to make a big dent to unemployment."
The IMF attributed the slight increases in global growth forecasts since October to a package of US tax cuts enacted late last year. It added that another stimulus package in Japan would also help.
"More generally, signs are increasing that private consumption . . . is starting to gain a foothold in major advanced economies."
While growth in China and India is expected to slow, these nations are still among the fastest-growing emerging economies, according to the IMF. The fund left the forecast for China unchanged at 9.6pc and held India's growth outlook at 8.4pc.
Ulster Bank Wealth, which made similar predictions about the world economy yesterday, said growth in the US was a good opportunity for Irish savers to invest in US shares and get out of emerging markets.
"Despite a sovereign debt crisis in Europe, a spike in food prices and ongoing concerns about the global economy, 2010 proved to be a positive year for investors in risky assets.
"Looking ahead we expect investors will increasingly gain confidence in the strength of the US economic recovery which will support US equities this year," said Ulster Bank Wealth investment director Alan Dunne.