IMF sees rising recession risk from euro credit crisis

The IMF is one of several organizations offering downbeat assessments. The World Bank last week projected even slower worldwide growth, of just 2.5 percent, and it forecast a euro-zone recession.

In a separate study released Tuesday, the Institute of International Finance said that the flow of capital into developing nations dropped by nearly 20 percent last year — a worrisome decline that also occurred during the 2008 financial crisis.

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Growing risk of recession

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The IIF attributed much of that drop to European banks pulling out of investments and lending in Eastern Europe and Asia. This is one of the most direct ways in which Europe’s troubles are affecting the rest of the world. The decline poses particular problems for Eastern European nations such as Hungary and Ukraine that, unlike some countries in Asia, do not have access to local sources of money when French, Italian or German investors disappear.

The downturn in investment is partly a consequence of policies enacted in Europe to try to cope with its crisis. In this instance, European banks are retreating from other parts of the world to comply with stiffer regulations that the European Union imposed last year — partly at the urging of the IMF — that require the firms to maintain larger capital buffers against possible losses. The requirements are combining with government austerity measures to crimp growth.

The speed with which Europe demanded that its banks meet the new requirements “is having a drastic negative impact,” said IIF chief economist Philip Suttle. The IIF, which represents the world’s major financial institutions, has been fighting to soften the impact of financial industry regulations crafted after the 2008 crisis.

In its new reports, the IMF shared the concern that Europe’s move to recapitalize its banking system could be damaging. To limit the fallout, the agency said the euro zone should use taxpayer money from around the region to bolster banks that need help — just as euro-zone countries are pooling resources to back troubled governments.