THE INTERNATIONAL Monetary Fund has urged the euro zone to step up efforts to recapitalise its banks, using the bloc’s rescue fund to ward off another financial crisis.
The fund said the euro zone needed to do more to boost growth, warning that the region’s economy was poised to shrink this year.
IMF policymakers meet in Washington this week. With yields rising on Spanish government debt, talks to boost the fund’s firepower to support a euro zone bailout are at the top of the agenda. However, in its World Economic Outlook published yesterday, the IMF urged Europe to do more itself.
“Given the broad need for fiscal adjustment, much of the burden of supporting growth falls on monetary policy,” it said. “The ECB should lower its policy rate while continuing to use unconventional policies to address banks’ funding and liquidity problems.”
The IMF edged up its forecasts for global growth but said recovery remained “very fragile”. It predicted that the euro zone economy would shrink by 0.3 per cent this year, compared to its forecast of 0.5 per cent in January.
The IMF said it expected the global economy to grow 3.5 per cent this year, up 0.2 percentage points from its January estimate.
The fund called for Europe’s banks to be recapitalised through taxpayer funds via the European Financial Stability Facility or the European Stability Mechanism.
“Partial public recapitalisation of banks does not appear to be on the agenda any more but perhaps it should be,” Olivier Blanchard, the IMF’s chief economist, said.
Despite resistance from Germany, the IMF continued to champion euro bonds, saying a common euro bill market was “urgently needed”.
In the IMF’s Fiscal Monitor, also published yesterday, Irish policymaking institutions were compared favourably to those of Portugal in terms of how the two countries had implemented measures to address their respective budgetary crises.
The IMF also said both countries’ adjustment programmes had placed the burden of adjustment on the better-off.
Ireland had a “well-established institutional framework in place when the crisis hit, strengthening the country’s capacity to deliver on targets and providing firm control over local government spending”, the report said.
It went on to say that “public finance management, revenue administration and the debt management agency have been proactive, anticipating problems and implementation challenges, and recalibrating policies accordingly”.
It described the 2009 McCarthy report on public spending as “timely” and providing “a menu of high-quality measures which have been implemented progressively”.
The praise for Irish budgetary institutions is unusual. The Department of Finance, in particular, has come in for criticism for what it did and did not do in contributing to the crisis and addressing its consequences. – (Additional reporting: The Financial Times Limited 2012)
