IMF: Global economic recovery fragile and risk of relapse high

From The Guardian UK:

Disorderly default and exit by eurozone member could spark market panic and cause bigger crisis than after Lehman collapse, IMF says in World Economic Outlook report

in Washington, Tuesday 17 April 2012

The International Monetary Fund warned today that the European debt crisis could flare up again at any time and send the global economy back into deep recession.

Olivier Blanchard, the Fund’s chief economist, said there was currently “an uneasy calm” following the tensions in financial markets at the end of 2011, with hopes of a gradual recovery dependent on keeping the single currency in one piece.

The IMF also gave the Bank of England the all-clear to add to its £325bn programme of quantitative easing if the UK economy struggles to recover from its longest and deepest recession of the post-war era. The Fund said that there was a risk of a 1930’s style slump. “In the current environment of limited policy room, there is also the possibility that several adverse shocks could interact to produce a major slump reminiscent of the 1930s.”

Asked about the risks that a country would leave the euro, Blanchard said: “We are doing everything possible so that this does not happen.”

The IMF’s chief economist said membership of the single currency made it harder for countries to become more competitive, but added: “For the moment there is no plan B. The costs of one country leaving the euro unilaterally would be very big and would lead to a very large drop in output.”

Blanchard said there would be contagion risks if one country departed from the single currency, and said this would be one of the circumstances in which the firewalls would be needed. There would be knock-on pressure on the sovereign bonds of other nations, he said.

At a press conference to mark the publication of the IMF’s flagship World Economic Outlook, Blanchard, said: “In the fall, a simmering European crisis became acute, threatening another Lehman size event, and the end of the recovery.

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