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IMF fears another global banking crunch

THE crisis in the eurozone could trigger another global banking crunch, the International Monetary Fund (IMF) says in its three-monthly update on the world economy.

The troubles in Ireland, Greece and Portugal, along with a large government deficit in the US, mean risks to the global economy are seen as higher than at the time of the April report, the IMF says.

Despite its criticism of the position of EU governments and the ECB on bailouts in the three countries, the report said it did not favour any easing of the pace of financial correction.

"In the euro-area periphery, there is no way around ambitious structural reforms to boost competitiveness and revive employment growth, along with front-loaded fiscal adjustment and balance-sheet repair," the report said.

"The key message is we are entering a new phase of the crisis -- I would call it the political phase of the crisis," said Jose Vinals, IMF director of monetary and capital markets.

"Now time is of the essence to take the political decisions that are needed to avoid problems down the road. Sovereign risk is an issue in Europe; it's an issue in the United States."

The report said that, if these risks materialised, the effects would reverberate across the rest of the world, "possibly seriously impairing funding conditions for banks and corporations in advanced economies and undercutting capital flows to emerging economies".

The report, prepared before yesterday's Franco-German agreement on Greece, said it was vital Europe forged a political consensus behind a rescue package for Greece and that politicians in Athens kept their promises for reform.

"One should not take a Greek default, or a potential Greek default, as the assumption. We are working very hard to avoid this scenario," said Mr Vinals.

The IMF was highly critical of the slow pace of repair to the banking system in Europe.

"The window of opportunity to prepare the financial and economic system against potential systemic shocks could close unexpectedly," the report said.

At the same time, the eurozone is one of the few areas where growth forecasts are higher than in the April report.

Output is expected to expand by 2pc this year -- 0.4pc more than previously thought.

But this is due to higher-than-expected growth in Germany and France, with the peripheral countries mired in recession. For this reason, the IMF repeated its call to the ECB to keep interest rates low until there was clear evidence of inflation.

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