“Urgent policy adjustments are needed to avoid the stalling global recovery and address the strong negative spillover effects of national or regional developments on other parts of the world,” Charles Dallara, IIF managing director, wrote today in a letter to the International Monetary Fund’s steering committee.
Greece is trying to reach an agreement on austerity measures with officials from the European Union and IMF for the release of 31 billion euros ($40 billion) under the country’s bailouts. The Washington-based IIF, which represents more than 460 financial companies, said Greece should be given more time to meet deficit targets and lenders could accommodate the nation with lower interest payments.
“In the period immediately ahead, euro area leaders need to move more decisively to implement the announced measures in a timely manner to avoid a reversal of the recent broadly positive market sentiment,” Dallara wrote. That includes establishment of a single bank supervisor to recapitalize banks by the European Stability Mechanism and a new European Central Bank bond purchasing program.
Dallara’s letter comes before IMF and World Bank annual meetings in Tokyo Oct. 9-14 where officials will focus on implementation of the euro zone programs. Dallara said the meetings will take place at a “time of weakening global economic growth, high or rising unemployment and substantial downside risks.”
“The global economy is at a crossroads,” Dallara wrote. “Urgent policy adjustments are needed to avoid the stalling global recovery and address the strong negative spillover effects of national or regional developments on other parts of the world.”
ECB President Mario Draghi said today that the bank is ready to start buying government bonds as soon as the necessary conditions are fulfilled by any countries needing assistance. The ECB is ready to undertake Outright Monetary Transactions “once all the prerequisites are in place,” Draghi said at a press conference in Ljubljana, Slovenia, after policy makers left the benchmark rate at a historic low of 0.75 percent.
A month after Draghi unveiled the unprecedented bond- purchase plan to lower yields on government debt, Spain, the country most likely to take up the offer, is still mulling whether it wants to accept the conditions attached. At the same time, the euro-area economy probably entered a recession in the third quarter as the sovereign debt crisis damped spending and investment.
Dallara said euro member countries should agree to appropriate conditionality to allow the ESM and ECB to begin purchasing their bonds.
The European Union last month unveiled proposals for euro- area bank oversight. The IIF urged “a clear roadmap” on measures for the single bank resolution and a common deposit insurance framework to have an “immediate salutary effect on market confidence.”
For the U.S., the IIF urged action to avoid the “fiscal cliff” and said a lack of consensus has weakened market confidence and deterred business and consumer spending. If current law remains unchanged, the IIF estimated that there would be a fiscal contraction of about 4 percent of GDP.
“The immediate priority is to reach a transparent, bipartisan agreement to avoid the ‘fiscal cliff’ and raise the debt ceiling, in the context of a balanced, credible and comprehensive multi-year fiscal consolidation plan, rather than piecemeal temporary measures that only prolong policy uncertainties,” Dallara wrote.
The IIF also said the Federal Reserve’s recent quantitative easing is “broadly welcome.” Dallara cautioned that its effect may be limited without fiscal policy action and a new regulatory framework to facilitate bank credit expansion.
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