The IMF said in a stark tone that the European policymakers need to deepen the financial ties with some urgency to restore confidence in the financial system. IMF wrote in its Global Financial Stability Report today, that European banks need to sell about $4.5 trillion in assets to contain the financial crisis. This amount is 18 percent higher than IMF’s April estimate of $3.8 trillion.

Since April, the policymakers have been delaying the decisions to stem the financial crisis has increased funding pressures. Though ECB has launched the unlimited three year loan program, its effect is fading. IMF said that if fiscal tightening fails, 58 EU banks, including Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) and UniCredit SpA (BIT:UCG) (BIT:UCGR) have to shrink their assets. That will hamper the growth in PIIGS countries by approximately 4 percentage points.

European bank

IMF managing director Christine Lagarde said that the fund need not lend money to Spain to rescue the troubled country. Though bond yields have declined after ECB’s plan to purchase unlimited bonds from the debt-laden countries, ECB awaits a bailout request from Spain, before bringing the program into action. But Spain may not be able to meet the budget target set by ECB.

During a press conference in Tokyo, Jose Vinals, IMF director of monetary and capital markets, said that ECB’s bond purchase program should be perceived in the market as real and not “virtual”, and it should be accompanied with credible conditionality. In July, Mario Draghi had pledged to do whatever it takes to keep the European Union alive.

IMF is currently monitoring a 100 billion-euro bailout of Spanish banks. The fund is also co-financing several rescue packages for Portugal, Greece, and Ireland. In the baseline scenario, where governments are required to follow up on their commitments, IMF says there will be $2.8 trillion of reduction in bank assets.

“Despite many important steps already taken by policymakers, this agenda remains critically incomplete, exposing the euro area to a downward spiral of capital flight, breakup fears, and economic decline. Unless confidence in the euro area is restored, fragmentation forces are likely to intensify bank deleveraging, restrict lending, add to the economic woes of the periphery, and spill over to the core.” the IMF said in its report on Wednesday.

IMF warned the United States and Japan, both under huge debt burden, that they also face risk to their financial stability. Though emerging markets have weathered the international shocks so far, IMF points out that many Central and Eastern European countries are vulnerable to Eurozone crisis. Asia and Latin America look more resilient, but they are also showing signs of slowdown.

Asian stocks declined for the straight third day today, and the MSCI Asia Pacific Index is down 0.9 percent. Ironically, ECB head Mario Draghi blames the Asian slowdown for the weak European growth.