IMF tells Europe that confidence is ‘fragile’

The International Monetary Fund urged European policy makers to deepen the financial and fiscal ties within the euro area with some urgency to restore sagging confidence in the global financial system.

In its semiannual check on the world’s financial health, the fund said the euro area’s debt crisis was a key threat and the risks to global financial stability had risen in the last six months leaving confidence “very fragile.”

The euro area’s plodding progress means European banks are likely to offload $2.8 trillion in assets over two years to reduce their risk exposure, an increase of $200 billion from a prediction six months ago, the IMF estimated.

“Despite many important steps already taken by policy makers, this agenda remains critically incomplete, exposing the euro area to a downward spiral of capital flight, breakup fears and economic decline,” the IMF said in its Global Financial Stability Report (GFSR) released on Wednesday.

“Risks to financial stability have increased since the April 2012 GFSR, as confidence in the global financial system has become very fragile,” the IMF said.

The report adds to the gloomy backdrop to the IMF’s semiannual meeting to be held in Tokyo later this week. On Tuesday, it said the global economic slowdown was worsening as it cut its growth forecasts for the second time since April and warned U.S. and European policy makers that failure to fix their economic ills would prolong the slump.

Last week, Canada’s finance minister, Jim Flaherty, expressed his latest sign of frustration over progress in resolving Europe’s debt crisis by saying it represented a “clear and present danger.”

In September, the European Central Bank agreed to buy the bonds of debt-strained governments once they have signed up for a euro zone bailout program, restoring some market confidence and narrowing the spread between core and peripheral debt in the region.

But private investors still lack confidence in peripheral European markets and the difference between the yields on peripheral and core debt from banks and companies remains high, threatening any recovery, the IMF said.

Reuters