IMF Calms Fears on Greece, Warns Debt Crisis Could Spread to 'Core Euro Area'

(May 12, 2011) — According to a warning by the International Monetary Fund (IMF), the sovereign debt crisis could still spread to the core euro zone countries and the emerging economies of eastern Europe.

“Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,” IMF said in its latest economic report — released Thursday — on Europe. The global lender noted that it would provide additional monetary aid to Greece if needed, yet indicated that the country is likely headed in the right direction. Calming fears over the sovereign debt crisis in Europe, Antonio Borges, director of the IMF’s European Department, said that the IMF does not currently anticipate the chance of sovereign default in Europe, yet also warned he doesn’t believe in “a miraculous restructuring solution.”

According to the IMF, substantial measures have already been put in place in the euro area to overcome the crisis. Nationally, new policies are being implemented to bolster confidence. Regionally, the governance framework is being revamped. “Important actions are still required to deal decisively with weak banks across Europe’s advanced economies, and to follow through with implementing the EU-wide reforms that have been agreed in principle,” the IMF noted.

Nevertheless, markets remain increasingly concerned that Greece will be unable to pay back its mound of €327 billion in debt, triggering massive investor losses. Greece may request an additional €60 billion ($85.21 billion) in aid and try to restructure its current debt package.

Furthermore, IMF’s Borges has urged the European Central Bank to have a cautious approach toward increases in interest rates after last month’s first increase since 2007, the Wall Street Journal reported, saying euro zone “monetary policy could afford to remain relatively accommodative.”