Sovereign debt woes in Greece and other weak eurozone countries are putting the global economic recovery at risk, the IMF warned Friday as it called for a shoring up of financial systems.
The debt trouble risks "derailing the European recovery and perhaps even the world recovery," the International Monetary Fund's research director Olivier Blanchard said in Sao Paulo as the IMF released its regular report on the world economic outlook.
"The stakes are very high" as Europe struggles to rein in economic instability, he said, adding that the eurozone faces "a long and painful process" to return to fiscal health.
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If it failed, Blanchard said, there was the potential for "disorderly and destabilizing defaults" whose impact could be felt all around the world.
The IMF report stressed that the European Union has little time left to resolve sovereign debt problems, amid rising concerns among investors and the public.
"Policymakers must act now to make the financial system more robust," according to the report.
"The current window of opportunity to prepare the financial and economic system against potential systemic shocks, importantly by providing clarity on euro area-wide solutions to strains in the periphery, could close unexpectedly."
The Fund, in an update of its April Global Financial Stability Report, noted that concerns about debt sustainability and support for adjustment efforts in the eurozone periphery had intensified.
"Credit default swap spreads have risen to new highs in Greece amid concerns over the degree of political resolve that will be needed to implement adjustment and secure needed funding."
The IMF also highlighted that worries about the bailed-out eurozone periphery economies of Greece, Ireland and Portugal have renewed the market's focus on the potential for contagion of shocks to banks.
Banking systems in core European countries, such as Germany and France, still have large exposures to peripheral countries, and the pace of banking system repair has been too slow, it warned.
A market shock could come from an unexpected sudden pickup in risk aversion that "leads market participants to narrow their tolerance for incomplete policy solutions."
"It could also be closed by political developments, either because adjustment programs lose political support in debtor countries, or because populaces in creditor countries lose patience in continuing to finance those programs," the Washington-based institution said.
"Thus, a more robust financial system, notably in Europe, is needed to gird against shocks."
