The European Central Bank is under increasing pressure to reduce interest rates after a warning from the International Monetary Fund that the euro zone debt crisis risks running ‘‘beyond the control’’ of political leaders.
The fund’s abrupt assessment, that the global economy is in a ‘‘dangerous new phase’’, came on a day in which a credit rating downgrade of Italy stunned markets and led to a frosty response from prime minister Silvio Berlusconi.
The IMF urged the European Central Bank to continue buying up the debt of weakened countries and said the bank should cut interest rates if current tensions persist.
Warning of the risk of a return to recession in Europe and the US, the Washington-based fund said the time had come for Europe to “get its act together” to confront the debt crisis.
“There is a wide perception that policymakers are one step behind the action, markets,” said IMF chief economist Olivier Blanchard.
“When could things go wrong? Any time . . . Policymakers don’t have the luxury of time.”
The IMF predicted Ireland would achieve its budget deficit target next year and expects the economy to grow at a faster rate than the wider euro zone for the first time since 2007.
The fund has been led since July by former French finance minister Christine Lagarde, who knows first-hand how conflicts over the response to the debt crisis have hampered Europe’s response.
She will steer the fund’s annual meeting in Washington this weekend, when Europe is likely to be urged to step up its response.
The abrupt message from the IMF came as Greece continued emergency talks with the EU-IMF bailout “troika” as it attempts to secure the €8 billion loan it needs to avert a sovereign default next month.
Those talks advanced last night when the EU Commission said the troika had agreed to send inspectors to Greece next week to resume a suspended review of the bailout: “Good progress was made and technical discussions will continue in Athens over the coming days.”
The Greek government said it will make announcements later today on austerity measures it is discussing with its international lenders.
"In the framework of our ongoing negotiations, measures and announcements will be made today afternoon," Greek deputy government spokesman Angelos Tolkas told state television.
After a two-hour phone call with senior officials from the 'troika' of EU and IMF emergency lenders late last night, Greek finance minister Evangelos Venizelos was set to present to the Greek cabinet today his proposals on bringing forward painful austerity measures .
With Europe facing pressure to swiftly implement decisions to reinforce its bailout fund, doubt was cast over plans for quick parliamentary approval for the new measures in all countries when Slovenia’s government collapsed yesterday.
The IMF cut its growth forecast for the global economy yesterday, saying the situation in the euro zone and the worsening outlook for the US economy each cast big downside risks to that assessment.
“The first [risk] is that the crisis in the euro area runs beyond the control of policymakers, notwithstanding the strong policy response agreed at the July 21st, 2011, EU summit,” the IMF said.
While an agreement to reinforce the euro zone bailout fund is still to be ratified by most single-currency countries, the IMF said policymakers should follow through swiftly with that decision.
“In the meantime, the ECB must continue to intervene strongly to maintain orderly conditions in sovereign debt markets,” it said.
This was seen as an implicit call on the ECB not to stop the bond-buying campaign as a result of growing internal divisions over the policy.
“Furthermore, given declining inflation pressure and heightened financial and sovereign tensions, the ECB should lower its policy rate if downside risks to growth and inflation persist,” it said.
The downgrade of Italy by Standard & Poor’s reflects the lack of confidence in Mr Berlusconi’s new austerity plan, a much-revised package of tax hikes and spending cuts which was agreed only after repeated chopping and changing.
Mr Berlusconi strongly defended his government in the wake of the move by S &P, which questioned his “government’s ability to respond” to the euro zone crisis.
“The government has won every confidence vote in parliament, thus showing that it has a stable majority. Standard and Poor’s ratings seem based more on a reading of the daily papers than on the reality of things and they are flawed by political considerations.”
