Global leaders and businessmen urged Europe on Monday to take fresh steps to resolve its deepening debt crisis, with a top executive of the IMF warning the continent will see a downward spiral of collapsing confidence if no further action is taken.
The comments came just days after Standard & Poor's downgraded the credit ratings of nine euro-zone countries, a move which rattled global stock markets on Monday on fears that the currency bloc could shatter, triggering a global recession.
Without ... action, Europe will be swept into a downward spiral of collapsing confidence, stagnant growth and fewer jobs, David Lipton, first deputy managing director at the International Monetary Fund, told the Fifth Asian Financial Forum in Hong Kong on Monday.
But with decisive measures in Europe and global support for Europe, it is possible to avoid a new phase of the crisis, he added.
Lipton urged countries in which inflation has eased to halt monetary tightening to bolster global economic growth, and said Asia should play a bigger role in the IMF.
In another ominous setback at the weekend, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default broke up without agreement in Athens, although officials said more talks are likely this week.
If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the euro zone's most heavily indebted state will unravel, raising the prospect of bankruptcy in late March, when it has to redeem 14.4 billion euros in maturing debt.
In the event of further deterioration in the European crisis, no country or region would be immune, Lipton said, adding that Asia had a huge interest in seeing the problems in Europe resolved.
Speaking earlier at the forum, Britain's finance minister George Osborne applauded the progress made by the euro area, although he too said further action was needed.
The euro zone has made progress in recent months, in particular the provision of liquidity to banks by the ECB, Osborne said.
But of course there remains more to do, as the euro area itself acknowledges.
HSBC Chairman Douglas Flint also highlighted the need for swift action.
There has to be market acceptance, market recognition that there is a mechanism to enforce or instill fiscal discipline, he said at the forum.
Japan's Vice-Minister of Finance for International Affairs Takehiko Nakao said the country's banks were willing to step in should European lenders decide to pull out of Asia to shore up their balance sheets back home.
I talked to senior officials at the banks recently, and they say they are willing to provide more money for investment and trade, Nakao said.
They are also thinking about buying some assets, but this is really difficult. The banks did so in the late 1980s and that was not very successful, so they must be very prudent.
European leaders are set to meet at a summit later this month to discuss how to boost growth and jobs.
At a summit on December 9, EU leaders secured agreement on drafting a new treaty for deeper economic integration in the euro zone, but the chances for more decisive measures to stem the debt crisis remain uncertain.
Lipton said the best way forward was for more liquidity to manage the crisis both for banks and sovereigns, more fiscal consolidation with a prudent but credible pace of adjustment and more growth to sustain that adjustment.
He said banks required more capital to reduce the scale of deleveraging and in the end more integration, both fiscal and financial, to ensure the viability and stability of the monetary union in Europe.
Deleveraging now threatens to push global growth below even our reduced forecasts, the IMF executive said, without elaborating.
He also said the U.S. economy had shown surprising signs of strength in the fourth quarter of last year, although ongoing disputes over U.S. budget problems remained an issue.
China's economy was being weighed down by slowing growth in the United States and the European Union, he said earlier this month, but the possibility of a hard landing should be ruled out.