Global economy has entered dangerous phase in which heavy government debt burdens could 'suffocate' recovery, says IMF Managing Director Lagarde
September 22, 2011
– The head of the International Monetary Fund says the global economy has entered a dangerous phase and that heavy debt burdens could "suffocate" a recovery.
Nations must work together to meet the growing risks, IMF Managing Director Christine Lagarde said Thursday. Banks must provide more capital, and governments need credible plans to get their debt under control.
Lagarde worries that some governments lack the political will to shrink rising deficits. That appeared to be a shot at the United States, where Congress has struggled to reach agreement on a deficit-reduction plan.
"The current economic situation is entering a dangerous phase," said Lagarde at a news conference kicking off the annual meetings of the 187-nation International Monetary Fund and its sister lending organization, the World Bank.
Lagarde says nations will make progress this week during the annual meetings and that they will ultimately meet the challenges ahead.
The gathering of world finance leaders comes at a perilous time for the global economy. World markets are plunging on fears that the U.S. economy has weakened and is adding few jobs, while Europe is confronted by a deepening debt crisis.
The Dow Jones industrial average fell more than 400 points at one point Thursday.
"I still think a double-dip recession for the world's major economies is unlikely, but my confidence in that belief is being eroded daily," World Bank President Robert Zoellick said Thursday, warning that the world remained in a "danger zone."
Earlier this week, the IMF slashed its growth forecasts for this year and next. And in a separate report, the IMF said the global financial system is facing its greatest challenges since the 2008 financial crisis.
Europe's troubles center on Greece. The Mediterranean nation could default on its debt next month unless it receives a $10.9 billion installment from a bailout fund managed by the European Central Bank, the European Commission and the IMF.
A default by Greece could destabilize other financially troubled European countries, such as Portugal, Ireland, Spain and Italy. It would also deal a blow to many European banks, which are large holders of Greek government bonds.
Treasury Secretary Timothy Geithner said Thursday that the United States has a huge stake in seeing Europe succeed. He said European governments would "act with more force" to resolve its debt crisis in the coming weeks.
He also said that the IMF had adequate resources to help in the European debt crisis. The IMF is already providing support to a bailout package for Greece.
Olli Rehn, the European Union's top economic official, said the 16 other euro zone countries won't abandon Greece and allow it to default on its massive debts.
"An uncontrolled default or exit of Greece from the euro zone would cause enormous economic and social damage, not only to Greece but to the European Union" and the rest of the world, Rehn said.
The U.S. economy appears to be slightly more stable than Europe. Still, more than two years after the recession officially ended, it is barely growing. Consumer and business confidence is low. In August, employers added no net jobs, and consumers didn't increase their spending on retail goods.
On Wednesday, the Fed said it will try to push long-term interest rates lower and make consumer and business loans cheaper by shifting $400 billion out of short-term Treasury securities and into longer-term bonds. Economists, however, doubt the plan will do much, and stocks plunged after the decision was announced.
President Barack Obama has proposed a $447 billion job-creation package. But the president's lacks support in Congress. Republicans strongly oppose his proposal to pay for it with higher taxes on wealthier households, hedge fund managers and oil companies.
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