The International Monetary Fund on Thursday called for a greater sense of urgency to address the Greek debt crisis and warned Europe it was taking too long to repair its banking system in the face of growing risks of contagion.
In another warning, the IMF said delays in raising the debt ceiling in the United States had increased downside risks for the global economy and urged Washington to immediately increase the $14.3 trillion debt limit.
The fiscal situation in Greece threatens market disorder that would affect funding rates for other vulnerable sovereigns and could have severe implications for financial institutions, the fund said in a surveillance note for Group of 20 leading economies.
It said global markets were very concerned with developments in Greece, which had serious implications for the strength of the global financial system.
A surge in Italian and Spanish bond yields, and further downgrades of credit ratings of Portugal and Ireland, have raised concerns that bigger euro zone countries could get dragged into the crisis.
Meanwhile, Treasury Secretary Timothy Geithner has warned lawmakers that time is running out to avoid a credit default ahead of an August 2 deadline for raising the U.S. debt ceiling.
In the United States, current debt dynamics with unchanged policies are unsustainable, the IMF said, warning that if markets were to become overly concerned a loss of fiscal credibility would be extremely damaging not only for the U.S. but for the rest of the world.
It also called on the United States and Japan to outline credible medium-term plans to deal with their high public debt levels, including through changes to government-funded health and retirement programs and revenue raising tax reforms.
The IMF said overheating pressures in emerging and developing countries were growing, and had become evident through rising inflation and rapid credit growth.
In emerging G20 economies, more rapid macroeconomic policy tightening and demand rebalancing is needed in some cases, the IMF added, also urging pragmatic use of measures such as capital controls, to manage the surge of capital into these markets.
Capital inflows were larger in Latin America than in emerging Asia and Europe, the Fund noted.
It recommended monetary policy stay pat in advanced economies given growth has recently slowed. In contrast, emerging market economies should consider raising rates to reduce rising overheating pressures.
But the IMF said markets were rattled by developments in Europe, where capitalization of banks has been slow and lagged that of Wall Street banks after the 2009 financial crisis.
Banks across the euro area and elsewhere are lagging behind in securing funding for 2011, the IMF said.
This is making them vulnerable to a further tightening in funding conditions, underscoring the importance for stepping up the pace at which they roll over maturing funding, since rollover needs remain substantial despite the ongoing deleveraging, it added.