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IMF warns global economic slowdown entering ‘dangerous new phase’

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An international team has decided it will return to Greece next week in hopes of reaching agreement on emergency loans needed to keep the country solvent and restore confidence in the financial health of the 17-nation euro zone.

Two days of talks among representatives from Greece, the European Union and the International Monetary Fund concluded Tuesday after registering “good progress,” the IMF said in a statement. Negotiations have centered on the budget measures Greece will take to ensure that it reduces government deficits as much as officials have promised.

The fund said it expected technical talks with Greece “to be completed soon,” with a full IMF mission to return to Athens early next week, presumably clearing the way for Greece to receive a new round of $11 billion in emergency loans next month.

The statement of progress came hours after the IMF warned that the global economy was in a “dangerous new phase” of slowing growth and eroding confidence — partly because of Europe’s inability to solve a set of problems arising from high public debt, a weakened financial system and slow economic growth.

Greece is a test case for whether the euro zone can meet the challenge. Nearly two years of efforts to address the country’s problems have run into repeated difficulties. These have included inaccurate IMF forecasts, slow follow-through by Greek officials to make promised changes and the inability of European leaders to convince global markets that euro-zone governments will pay their obligations.

The IMF’s latest forecast shows the Greek economy contracting by 5 percent this year, with the recession continuing through the end of 2012. That’s a significant change from July, when the agency projected a downturn of only 3.75 percent and said the Greek economy would expand slightly next year. Greece’s plans for cutting its government deficit were based on these overly optimistic projections.

A default by Greece could undermine confidence in Europe as a whole. This could drive up the borrowing costs of other countries, such as Italy and Spain, amid mounting risks of other defaults on the continent.

In its semiannual World Economic Outlook, the IMF said concerns about a possible Greek default are already affecting the world economy. Coupled with the economic slowdown in the United States and the impact of the Japanese earthquake, Europe’s debt crisis is putting the global recovery at risk, the IMF said.

“Global activity has weakened and become more uneven; confidence has fallen sharply recently; and downside risks are growing,” the fund said.

At a press conference, IMF economic counselor Olivier Blanchard issued what he referred to as a “call to arms” for European governments in particular to shore up their banks and use stronger measures to secure the finances of highly indebted countries.

The IMF’s report said that if European banks begin acknowledging possible losses on their holdings of Greek and other government bonds, it could tip the world into a new recession.

“We can’t assume we have another three months or six months or a year,” he said.

Underscoring the region’s difficulties, Standard & Poor’s downgraded Italy’s credit standing this week, saying that slow growth and weak political leadership had shaken confidence in the country. The downgrade is one in a series the rating agency has issued to governments that have large amounts of outstanding debt, including the United States.

Italy’s annual government deficit is not as bad as that of other euro-zone countries. But the country has a massive amount of debt outstanding, and its economy is among the worst-performing in the world. The move by S&P could push up Italian borrowing costs that have already been rising.

Italy’s size makes its fate critical to the debate over the euro’s future. The country is considered too big for the type of bailout being used to prop up Greece, and a default on its bonds would be ruinous to major German and French banks that have tens of billions of dollars invested in Italy.

The IMF’s projections show the world economy growing by 4 percent this year and next, down from earlier forecasts of 4.3 percent for 2011 and 4.5 percent for 2012. Growth in the developed world is expected to be 1.6 percent this year and 1.9 percent in 2012, with the United States and Europe growing at an even slower pace.

U.S. growth is projected at 1.5 percent for this year and 1.8 percent for 2012, while the 17-nation euro zone is projected to grow 1.6 percent in 2011 and a moribund 1.1 percent in 2012.

Growth in the developing world is expected to remain strong, with China growing 9.5 percent this year and 9 percent in 2012.

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