The IMF has ruffled feathers in Europe by calling on the region's banks to raise €200bn (£174bn) in fresh capital Photo: EPAThe International Monetary Fund (IMF) has issued its starkest warning to date that Europe's banking debacle is turning into a systemic threat to global finance and can no longer be allowed to fester.
By Ambrose Evans-Pritchard, in Dalian
5:12PM BST 14 Sep 2011
"This is the most urgent crisis facing the world today," said Zhu Min, the IMF's deputy managing director and China's voice at the institution.
"There is no room for politicians to muddle through: they have to take decisive action today. Banks must be recapitalised and made solvent," he said at the World Economic Forum in Dalian.
The IMF has ruffled feathers in Europe by calling on the region's banks to raise €200bn (£174bn) in fresh capital, with partial nationalisation and by compulsion if necessary, but events are fast vindicating the Fund.
William Rhodes, the former head of the Citigroup and a veteran of debt restructuring in Latin America and East Asia, said Europe had wasted its chance to stop the downward spiral.
"You only have so much time in a crisis before the losses become uncontrollable, as Latin America learned the hard way. But the Europeans thought they were different and refused to recognise the losses. Now they are facing contagion," he said.
"You can't just rely on austerity, you also have to show citizens that there is light at the end of the tunnel," he said, alluding to the Brady plan for Latin America that gave countries enough debt relief and oxygen to recover.
"What's spooking markets is that Europe's leaders say they will do this and that but fail to give a date, and that kills credibility," he said.
Victor Chu, chair of Hong Kong's First Eastern Investment Group, said Europe's policy shuffle had reached the end of the road. "My hunch is that Greece won't deliver so we have to think the unthinkable, and prepare for the worst," he said.
Vincent Van Quickenborne, Belgium's economy minister, said the EU had reached a pivotal moment where it either goes the whole hog as a "United States of Europe" or lets the project fall apart. "It's either unity or divorce, but divorce for Europe would be opening Pandora's Box," he said in Dalian.
The IMF's Dr Min said China too has a serious problem, with credit running at 200pc of GDP. "There is a large potential risk," he said.
The world can still avoid a double-dip recession, but only if the whole world works "hand in hand" to head off an imminent crisis.
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