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IMF Rates EU Debt Problems as Top Threat to Global Recovery

January 26, 2011

While the President of United States ended his State of the Union Address last night with the standard, our country is strong, the International Monetary Fund came out yesterday with a sobering view on the European Debt Crisis — it is the top threat to global economic recovery. As I stated yesterday, I think the President is too focused on China and India and not enough on our closest ally – the EU. In fact, there was no mention of Europe at all last night. There was no mention of strengthening our alliance. No mention of that scary of all words, ‘contagion’, the fear that Europes debt problems may spread uncontrollably to other countries.

The WSJ reported today The fund warned that absent a series of “comprehensive, rapid, and decisive policy actions,” market fears could spread to the stronger European economies and to others around the globe The IMF expressed concern about the growing linkage between bank and government debt woes in some European countries, as doubts about banks’ financial condition dovetail with questions about governments’ abilities to service their debts, which in turn heighten fears about rising funding costs, in a worsening cycle.

“In particular, continued market pressures could result in serious funding pressures for major banks and sovereigns, increasing the likelihood that problems spill over to core countries,” the IMF said.

So, we have an ongoing crisis in Europe and we hear no mention whatsoever from the President last night. Either that was intentional because the problem is so dicey that any comment would roil the markets, or it was a serious oversight.

In comments before the President’s speech, the IMF stated:

The absence of a credible, medium-term fiscal strategy would eventually drive up U.S. interest rates, which could prove disruptive for global financial markets and for the world economy,” the fund said.

The IMF said it expects the U.S. economy to grow 3% in 2011, up from its October projection of 2.3%, but just 2.7% in 2012. The fund also projected economic growth of 1.5% in the euro area this year, while China is expected to continue to lead the major economies with 9.6% growth in 2011.

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