Europe must do more to tackle its fiscal crisis, which is heaping extra pressure on an already-strained global financial system, the International Monetary Fund warned on Wednesday.
Despite some new policy measures, among them a bond-buying programme aimed at helping debt-riddled nations tame their borrowing costs, the risks of a world credit crunch and recession loom, the IMF said in a new report.
"(European) policymakers need to take additional measures to restore confidence," said the Fund's Global Financial Stability Report ahead of its annual meeting this week in Tokyo and a day after cutting its global growth forecasts.
"Risks to global financial stability have increased and financial markets have been volatile as European policymakers grapple with the ongoing crisis," it added.
The report comes a week after IMF head Christine Lagarde urged eurozone leaders to move fast to resolve the bloc's debt crisis. "No one has the luxury of time, this is really urgent," she told the French daily Le Figaro.
"The cost of solutions increases as time passes," she added.
The European Central Bank last month announced a programme to buy the government bonds of debt-ridden eurozone nations under strict conditions but it remained unclear whether troubled countries, notably Spain, would accept the offer.
"If there is no demand and if this is related to domestic political considerations, that would be unfortunate," Jose Vinals, director of the IMF's monetary and capital markets department, told a news briefing in Tokyo as the report was released Wednesday.
The eurozone launched Monday its much-awaited 500-billion-euro ($643 billion) European Stability Mechanism rescue fund, which is seen as a major step in the bloc's defences against a debt crisis that has pushed it back into recession.
"(It) gives a lot of comfort that the size of the firewall has become sufficiently flexible and that makes a big difference," Vinals said.
The report's recommendations include cutting public debt and deficits "in a way that supports growth" and a "clean-up of the banking sector, including recapitalising or restructuring viable banks and resolving non-viable ones".
It also warned that a "further deterioration in the euro area crisis is the biggest risk to global financial stability, but rising imbalances elsewhere are also a cause for concern".
The United States and Japan both face looming fiscal hurdles, which, if not cleared, could upset the world financial system, the report said.
"Both countries require medium-term deficit reduction plans that protect growth and reassure financial markets," it said.
"The key lesson of the last few years is that imbalances need to be addressed well before markets start signalling credit concerns."
Emerging economies have fared relatively well through the several tumultuous years of global economic uncertainty, but they "need to guard against potential shockwaves from the euro area crisis, while managing slowing growth in their own economies".On Tuesday, the IMF added to concerns about the health of the global economy as it warned of a possible recession and cut its growth forecast for this year to 3.3 percent, from July's estimate of 3.5 percent.
Growth will only hit 3.6 percent next year -- lower than the 3.9 percent predicted in July -- as even powerful emerging economies like China, India and Brazil hit the brakes, the Fund said in its latest World Economic Outlook.
But those assumptions are based on Europe's leaders tackling the debt crisis and US politicians backing off harsh spending cuts and tax hikes slated for January 2013.
"Failure to act on either issue would make growth prospects far worse," the outlook said.