Urgent action needed to tackle Europe’s debt problems, warns IMF chief

IMF chief Christine Lagarde, addressing reporters as the IMF and World Bank began their annual meetings in Tokyo, praised recent steps taken by the European Central Bank and European governments, but said “more needs to happen, and faster”.

The warnings came as Spain’s credit rating was lowered to just above junk status, by agency Standard & Poor’s, and new figures showed unemployment in Greece hit a record high of 25.1 per cent in July as the country’s financial crisis exacts a heavy toll.

The IMF has scaled back its global growth forecast to 3.3 per cent for this year from an earlier projection of 3.5 per cent, and has warned that even its dimmer outlook might prove too optimistic if Europe and the United States fail to resolve their crises.

“We are not expecting a very, very strong recovery. The recovery continues, but it continues more slowly than we had expected earlier this year,” said Ms Lagarde. The slowdown is “having a ripple effect on emerging markets, and in particular in Asia”.

She praised the recent decision by the European Central Bank to buy unlimited amounts of government bonds to help lower borrowing costs. She also said European governments were taking steps to strengthen fiscal discipline and start to design a European banking supervision system.

She also said the US faces major risks in the so-called “fiscal cliff” next year, when tax increases and deep spending cuts will take effect unless Congress breaks a budget impasse.

“Here, too, decisive action is expected,” she added.

S&P cited Spain’s economic recession, high unemployment and social unrest for its downgrade.