The Fund urged Euro zone countries to quickly implement measures outlined at a July 21 summit to expand the bloc's rescue fund capabilities and grant a second bailout package to Greece.
It also stressed that bolstering the balance sheet of European banks above and beyond regulatory requirements is essential to bring back investor confidence in the region.
The IMF's warning comes after European finance ministers failed to agree over the weekend on how to address Europe's deepening debt troubles and decided to withhold crucial rescue money from Greece until the country does more to put its reform program back on track. "In a highly uncertain environment dominated by tension from the euro area sovereign debt crisis, risks to growth are mainly to the downside," the IMF said in the latest edition of its World Economic Outlook report.
The flagship report, warned that the U.S. and European economies faced recession and a "lost decade" of growth unless governments around the world took concerted actions to revamp their economic policies. It said the U.S. needs to be less dependent on debt and the Euro zone needs to find a solution for its sovereign debt crisis, among other things.
The IMF lowered its growth targets for all the major economies. It said it assumed it would be ‘business as usual’ with no default by Greece and on the condition that President Obama’s $447 billion stimulus package gets approved. However, markets are predicting a near 100 percent certainty that Greece will default on its sovereign debt, and the chances of Obama's stimulus package getting through is unlikely.
The IMF called on Europe to ‘get its act together’ and urged policymakers to deal with the banking crisis by ‘injecting new capital and restructuring weak but viable banks while closing others…and injecting public funds’. Overall, the IMF reduced its estimate of global growth by 0.3 percentage points since its most recent estimate in June.
For 2012, the IMF forecast world growth would remain steady at 4 percent, a 0.5-percentage-point reduction from its previous estimate in June. The IMF forcasts the U.S. economy to grow 1.5 percent this year, only slightly less than the Euro zone, at 1.6 percent. It expects Japan's economy to contract 0.5 percent this year. The IMF said China is expected to grow 9.5 percent this year, lower than the 10.3 percent growth in 2010, while India's growth is likely to slow to 7.8 percent this year from 10.1 percent last year.
European policy makers must ratify a July 21 agreement that strengthens Europe's 500 billion euro ($685 billion) bailout facilities, the IMF said.