"Without collective, bold action, there is a real risk that the major economies slip back instead of moving forward," IMF Managing Director Christine Lagarde said in a speech ahead of IMF and World Bank meetings of global financial leaders in Washington next week. Warning that the world had entered a dangerous new phase, she said global growth was slowing with advanced economies facing an "anaemic and bumpy recovery."
In contrast, emerging economies faced overheating pressures with inflation rising, strong credit growth and expanding current account deficits. Lagarde said timid economic growth and weak public balance sheets in developed nations were feeding negatively on each other, fuelling a crisis of confidence and restraining demand, investment and employment.
"This vicious cycle is gaining momentum and, frankly, it has been exacerbated by policy indecision and political dysfunction," Lagarde said. She said the confidence crisis involved banks in Europe and households in the United States, and urged their leaders to develop credible medium-term plans to stabilise and lower debt.
In Europe, Lagarde said eurozone leaders must "address firmly their financing problems through credible fiscal consolidation" and ensure that all banks are properly capitalised. She said financial sector reforms should be the priority. While there was broad agreement on capital and liquidity standards for banks, there were still substantial gaps in areas like supervision, cross-border resolution and shadow banking systems, Lagarde added.