The IMF (International Monetary Fund) has said in its World Economic Outlook report that the collapse of the single Eurozone could be a real prospect. It warned that the breakup of the Euro could trigger a world-wide economic slump that would rival the great depression.
A return to recession is predicted in the Eurozone in 2012 although estimates for the UK have been revised and improved. Unease is prevalent as Greece is expected to default on its debts and possibly leave the euro.
The IMF report said: ‘If such an event occurs, it is possible that other euro area economies would come under severe pressure as well, with a full-blown panic in financial markets. Under these circumstances, a break-up of the euro area could not be ruled out. This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.’
To rescue the euro from the brink of collapse the IMF has said if the European banks want to balance the books by the end of 2013 they will have to shed an enormous £1.6 trillion of bad debt.
The massive tightening of belts by banks would see a huge impact on the availability of loans for businesses and households. The reduction in the availability of credit could seem more people resorting to more readily available short term loans as a borrowing method.
Jose Vinals, the IMF’s top financial expert warned that ‘Serious damage would be done to asset prices, credit supply and economic activity. Unless European banks speed up the repair work now, the damage could be even greater especially if the current stresses in the financial markets were to intensify.’