Telegraph
“The recovery could still stay the course, but this scenario could now easily be derailed by the renewed financial market turmoil,” the IMF says in a report for eurozone finance ministers today, according to Reuters. “The sovereign and financial market storm affecting the periphery constitutes a severe downside risk.”
The IMF said the EU’s €500bn bail-out machinery was not enough to cope with the magnitude of the threat as Spain and even Italy start to come under pressure.
“There is also a strong case for increasing the resources available for this safety net and making their use more flexible, including for the purpose of providing more effective support to banking systems,” it said.
Dominique Strauss-Kahn, the head of the IMF, will present the report on the economy of the 16 countries using the euro at a meeting of eurozone finance ministers and Jean-Claude Trichet, the European Central Bank president, on Monday.
The fund said the ECB’s bond purchases should be “expanded” to restore calm. The ECB bought Portuguese and Irish bond markets last week, forcing down spreads dramatically in a “short squeeze” against speculators in small illiquid markets. This merely buys time.
It is does not solve the structural problem that a large part of the eurozone faces a huge financing need yet has lost reliable access to capital markets. The ECB has so far ruled out mass purchases of Spanish and Italian bonds, bowing to a de facto German veto.
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