THE INTERNATIONAL Monetary Fund has warned euro zone countries in an unusually strongly worded statement that its debt crisis could “overwhelm” its recovery. It also called yesterday for an end to “the unproductive debate about debt reprofiling or restructuring”.

The IMF describes the challenges facing the countries on the periphery of the euro zone as “daunting” and says “failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers”. It said a signal needed to be sent that everything will be done to maintain the stability of the euro zone.

The statement is a further ramping up of the IMF’s increasingly vociferous urgings to European governments. In recent months, it has at times shown considerable impatience with the collective European response to the crisis.

There have also been clear differences between the IMF and the European positions on the Irish bailout. Yesterday’s statement included no mention of any individual country.

It came after a meeting between fund officials and euro area finance ministers in Luxembourg. Among the policy recommendations it makes is a proposal to increase the size of the euro zone bailout fund, the European Financial Stability Facility.

The IMF suggested expanding the uses of the facility to include purchasing bonds in the secondary market. This would allow outstanding bonds that have fallen in price (as a result of increased default risk) to be bought at below face value and retired. This would lessen weak countries’ debt burden while avoiding default.

The IMF urged euro zone governments to state how they will recapitalise any banks that fail ongoing stress tests. Interest rates should return to more normal levels only “gradually” and “cautiously”. This appears to be a mild criticism of the European Central Bank which is expected to raise interest rates for the second time this year in early July. The ECB is the only major central bank to have begun tightening. The US, British and Japanese monetary authorities have all concluded that the risks of renewed slump in their economies is greater than any inflationary risks.

The fund urged all countries to continue with budgetary consolidation and to try to meet deficit reduction targets ahead of schedule. “The positive confidence effects from fiscal adjustment – both for the euro area itself as well as global spillovers – could be sizable.”