IMF Warns Eurozone of £400b Global ‘Earthquake’



The debt crisis crippling the Eurozone could trigger an ‘earthquake’ that slashes hundreds of billions of pounds off the global economy, the world’s financial watchdog warned last night.

The International Monetary Fund urged European leaders to rescue Greece and stop the shockwaves spreading to some of the region’s largest economies, including Italy and Spain, and the rest of the world.

‘It would be very costly not just for the Eurozone but for the global economy to delay tackling the sovereign crisis,’ said Luc Everaert, head of the IMF in the single-currency bloc.

Contagion risk: The IMF urged European leaders to rescue GreeceContagion risk: The IMF urged European leaders to rescue Greece

The Washington-based Fund said that in its ‘earthquake scenario’ – where the crisis spreads through the entire Eurozone – the size of the economy in the region would fall 2.5 per cent.

Global growth would fall by around 1 per cent, it said, or nearly £400billion.

The price of gold raced to a fresh high of $1,610 an ounce yesterday as nervous investors piled money into ‘safe havens’. Borrowing costs in the Eurozone also rose, making it even more expensive for governments to operate.

European leaders meet in Brussels tomorrow in a desperate effort to break the deadlock over a second bailout for Greece.

It is feared that if an agreement is not reached, the crisis will engulf Italy and Spain and lead to the collapse of the euro. One leading economist in London said it was ‘last-chance saloon’ for politicians to save the single-currency union.

Bond yields rise when investors want a better return to compensate for risk when lending to a government. Yields for the UK have remained rock bottom while Italy and Spain pay the price for high debts and for offering poorer prospects for repaying them

But German Chancellor Angela Merkel played down the chances of the emergency summit resolving the crisis in Greece.

She said there would be nothing ‘spectacular’ decided in Brussels, adding the meeting ‘will help in this, but further steps will be needed’.

Suki Mann, a senior analyst at Societe Generale in London, said: ‘As another D-day looms on Thursday, we have few soothing words,

‘Greece appears beyond repair, Italy is on the brink and the chances are that the euro might be no more very soon.’

Former Tory chancellor Lord Lamont said the crisis tearing through the Eurozone was ‘much more serious’ than the phone hacking scandal. He urged European leaders to ‘come up now with a comprehensive solution’.

Priorities: Lord Lamont said the Eurozone crisis was 'much more serious' than the phone hacking scandal Priorities: Lord Lamont said the Eurozone crisis was ‘much more serious’ than the phone hacking scandal

Greece, Ireland and Portugal have already received £240billion of bailout loans from the EU and the IMF – including £12.5billion from Britain, or £500 per family.

But Greece needs a second rescue package, worth around £100billion, to stop it defaulting on its debts.

Europe is at loggerheads over how to deal with the crisis in Greece and its failure to do so has put Spain and Italy in the firing line.

In its latest report on the 17  single-currency nations, the IMF said: ‘An intensification of the debt crisis, especially if it were to spread to the core euro area, could have major global consequences. The euro area plays a major role in the global economy and therefore has potentially large spillover effects on the rest of the world.’

The Fund said ‘financial markets remain under stress, underscoring the urgent need for strong measures’ to shore up the euro bloc.

Looking to tomorrow’s meeting, Jonathan Loynes, chief European economist at Capital Economics, said: ‘This crucial summit could provide the last-chance saloon for Eurozone policymakers to get a grip on the region’s debt crisis.

‘Anything other than a very decisive response could see the situation become irretrievable.’

Spain was in the spotlight yesterday after its borrowing costs soared by more than a third.

Protests: EU leaders are to meet in Brussels in the hope of breaking deadlock over a second bailout for GreeceProtests: EU leaders are to meet in Brussels in the hope of breaking deadlock over a second bailout for Greece

The country sold £3.9billion of bonds to investors on the financial markets – but the interest rate on the loans hit 3.7 per cent. That was 37 per cent higher than the 2.7 per cent paid during a similar auction last month and underlined how nervous investors are to lend to Madrid.

Meanwhile, President Barack Obama said there had been ‘some progress’ in negotiations over raising the nation’s debt ceiling.

If it is not raised, the U.S. will default on its loans, which financial experts say would be ‘catastrophic’ for the global economy.

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