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IMF: Euro governments must clean up banks

(Agencies)
Updated: 2009-07-30 23:11

LONDON: The 16 countries that use the euro are unlikely to start growing again until some time in 2010 and must do more to shore up their banks if they want to keep the downturn from lasting longer, the International Monetary Fund said Thursday.

In its latest update for Europe, the IMF's staff forecast that the euro zone will shrink by 4.8 percent this year alone and by 0.3 percent in 2010 despite the anticipated recovery some time in the year.

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The director of the IMF's European department, Marek Belka, welcomed the initiatives being trumpeted around Europe to clean up the banks, but stressed that any vulnerabilities exposed must be accompanied by swift action to restore confidence in the financial system.

"The more is done to clean the banks...the more robust the recovery will be," Belka said in a conference call with reporters.

Stress tests are currently being conducted at the national level and in a coordinated fashion for the largest 22 banks in the European Union.

Belka said that it's imperative that any problems identified are dealt with immediately by governments across the continent, whether it involves putting more money into the banks to get their capital positions in shape or backing major restructuring initiatives.

The IMF staff said that a "more proactive approach" to cleaning up the banks would help monetary and fiscal policies to be more effective in supporting demand, reduce the risks of any further financial crisis and the dependence on taxpayer money.

If resolute action is not taken then private investors will remain on the sidelines and Europe would face the prospect of a prolonged spell of slow growth, the staff said.