The International Monetary Fund (IMF) has urged eurozone leaders to take immediate action over the region’s debt crisis, warning it could prove “very costly” for the world.
“It would be very costly not just for the eurozone but for the global economy to delay tackling the sovereign crisis,” said Luc Everaert, head of Euro Area Policies in the IMF’s European Department.
The?IMF?said that despite “support from euro area member states and the ECB, market participants remain unconvinced that a sustainable solution is at hand.”
It said in a staff report that the results of any policy decisions would be “unpredictable” and that the eurozone needed more private money to support the “most fragile” of its “still-frail banks”.
It warned that markets doubted the eurozone’s ability to find a solution to the debt crisis as it urged European leaders to act quickly to prevent contagion that could damage the global economy.
The Fund recommended that the European Financial Stability Facility (EFSF) be increased in size and allowed to purchase debt on the secondary market, as a means of easing the threat of contagion from eurozone peripheral states.
It also said the eurozone needed to adopt much stronger economic governance. “We need more Europe not less,” Mr Everaert said.
German Chancellor Angela Merkel, Europe?s reluctant paymaster, doused expectations of any comprehensive solution toGreece?s debt crisis at an emergency euro zone summit.
The summit is expected to try to finalize a second round of aid for Greece worth ?110bn, but nations are divided on how to structure this and comments from Merkel on Tuesday that the summit will not be the final step in the resolution of Greece’s debt crisis did not help sentiment.
The euro fell against the dollar after she said in a joint news conference with Russian president Dmitry Medvedev: “Further steps will be necessary and not just one spectacular event which solves everything. Whoever takes political responsibility seriously knows that such a spectacular step won’t happen.”
In order to solve Greece’s problems once and for all, the eurozone needed to consider the options for reducing its indebtedness and raising its competitiveness, she said.
“Europeis unthinkable without the euro and therefore it is worth making every responsible effort to really solve the problems at the very root,” she said.
The Russian president said eurozone financial woes are not a fault of the euro but a result of it being used by countries with uneven economics.
“The euro’s main problem today is that quite a strong and respectable currency serves countries with very different levels of economics,” Mr Medvedev said. “It never happened in the history of the mankind.”
Widespread hopes for a single solution to make the Greek crisis disappear were unrealistic, she said, as officials wrestled with complex options for involving private bondholders in a second rescue of the debt-stricken euro zone state.
The euro eased against the dollar after the German leader said demands were too high for Thursday?s talks, which are only part of an incremental series of steps to address Greece?s debt and competitiveness problems.
The ramifications of the Euro sovereign debt crisis were felt beyond Europe. Concerns about the potential fallout contributed to drive the S&P 500 index in the USdown by over 7% since the beginning of May. Oil prices also declined, from $126/barrel in early May to US$114/barrel on June 17th. Other factors, such as weak economic data from theUS have also contributed to the decline in investor sentiment, but the Euro debt crisis has certainly cast a shadow over global markets.
In the Gulf, stock exchanges often follow the trend of major international markets and are also impacted by changes in the oil price. Gulf stock markets have fallen by between 2.5% and 5% since early May, with the exception of the UAE, whose markets have been boosted by a potential reclassification to emerging market status.
Even if the present issues with implementing the Greek bailout package are overcome, it remains unclear whether Greece will be able to sustain its current debt levels in the long term.
The European currency area is facing the biggest crisis of its 12-year existence, with contagion threatening major economies such as Italy and Spain after three small members ?Greece, Ireland and Portugal? needed bailouts.
?Sources: Telegraph, profitimes, bullfax, zawya