The International Monetary Fund (IMF) urged the European Central Bank (ECB) to take countervailing measures against triple deleverage by cutting interest rates, and introducing negative deposit rates.
In its latest Article IV report on the Eurozone, the IMF also warned that early tapering by the U.S. Federal Reserve would risk reigniting the Eurozone debt crisis.
The IMF warned that early tapering would push the weakest countries in the Eurozone into a ‘debt-deflation spiral’.
Hence the fund suggests the European Central Bank must take countervailing action to prevent a ‘vicious circle setting in’, through various measures such as cutting rates, introducing a negative deposit rate, and purchasing a targeted range of private assets.
IMF anticipates economic growth in 2014
The IMF urged that European Central Banks should consider new LTRO for solvent banks, and targeted LTRO linked to new lending or direct buying or private assets.
The IMF also indicated that the Eurozone’s growth would shrink by 0.6 percent in 2013.
The IMF’s recent report comes on the back of fresh data from the ECB showing loans to the private sector contracted by €46 billion in June, after falling by €33 and €28 billion during May and April respectively.
Earlier, in its World Economic Outlook report, the agency indicated it anticipates the Eurozone to remain in recession in 2013 before showing signs of growth in 2014. The agency feels the euro’s growth is hampered due to low demand, depressed confidence, and fragmentation in financial markets, coupled with weak balance sheets and fiscal consolidation.
IMF concerned about high unemployment
The recent IMF report praised Eurozone authorities for measures to stabilize financial markets, which reduced the risk of a break-up. However, the IMF notes that “growth remains elusive and high unemployment persists, especially among youth”.
IMF on triple deleveraging solutions
The agency feels the EMU periphery has the daunting task of triple deleveraging by governments, households and firms, all at the same time.
Expressing concerns on ‘incomplete or stalled delivery of policy commitments’, the report urges the Eurozone to deliver on pledges from a proper banking union and resolution fund capable of swift decisions and burden sharing.
The IMF’s recent report also indicated that it may take years to unwind the colossal credit boom of the early EMU years.