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IMF warns of ‘dangerous new phase’ for world economy

September 22nd, 2011

Investors aren’t taking to the ongoing talk about Greece’s looming default lightly. On Monday, the European markets witnessed a sharp down turn.

According to The New York Times, the euro Stoxx 50 index retreated 2.9 percent. The FTSE 100 shed 2 percent in London, and the DAX dropped 2.8 percent in Frankurt.

Some expert economists believe that leaving the Eurozone and going into default may be the best route for Greece. The Wall Street Journal said “exiting the eurozone and re-adopting the drachma would enable Greece to devalue its currency versus the rest of Europe, and help it become more competitive, perhaps spurring economic growth.”

Greece, which has no intention of leaving the eurozone or file for bankruptcy, is working frantically with other eurozone countries to work out a deal to avoid default.

It is certain Greece can not afford to keep borrowing money to pay off their debt and it seems that bail out packages and extreme austerity measures are not falling into place as Greece would like.

One reason may be because of European political figures fear unpopularity if they supported these extreme austerity measures.  If this is the case, it remains to be seen how long politicians and the citizens of Greece will allow this slow crawl to economic destruction to go on.

Nonetheless, this dragging catastrophe must be dealt with quickly – Standard & Poor’s recently downgraded Italy’s credit rating from A+ to A.

Greece’s economic troubles continue to spill even into the world economy by causing uncertainty in by causing banks to reduce lending and hold onto cash – a major factor that continuously is brought about when discussing Greek debt: financial contagion.

The International Monetary Fund (IMF) has voiced their concern about this. Olivier Blanchard,  the chief economist of the IMF, said, “The world economy has entered a dangerous new phase. Markets have clearly become more skeptical about the ability of many countries to stabilize their public debt. Fear of the unknown is high.”

The IMF predicted a slower economic growth than it did earlier this summer for both the U.S. and Europe. According to The Associated Press, the IMF predicted the U.S. economy to grow just 1.5 percent in 2011, and 1.8 percent in 2012. In June, the IMF predicted a growth of 2.5 percent for this year and 2.7 for 2012. This is a significant down grade and should not be taken lightly.

The New York Times reported “Merrill Lynch estimates the shock to growth in Europe […] would be troubling, with overall output contracting by 1.3 percent in 2012.”

The IMF also predicted a growth decline in 2012 for the eurozone, but not as severe as Merrill Lynch’s 1.3 percent contraction for next year.

The IMF projected 1.6 percent in economic growth for 2011 in Europe, and 1.1 percent in 2012.

Last June, it predicted 2 percent for this year, and 1.7 percent for next – a 0.6 percent decline from their original 2012 projection.

Despite these effects of financial contagion in Europe, stronger economies in other countries such as China and India have been predicted to help the global economy to grow by 4 percent, according to the IMF.

According to The Associated Press, these stronger economies should be able to offset most of the finanical trouble in the U.S. and Europe.