NEW DELHI, Dec 2 – The head of the International Monetary Fund (IMF) said on Thursday that the debt crisis in Europe should not be underestimated, but tipped Ireland to recover after its weekend bailout.
On Sunday, the European Union (EU) and the IMF announced an 85-billion-euro (111-billion-dollar) rescue package to shore up Ireland\’s banking sector and enable the country to meet its debt obligations.
The move has calmed fears about Ireland but led to intensified speculation that fellow eurozone debt-ridden financial stragglers Portugal and Spain could also need help in due course.
Greece, another eurozone laggard with chronic public finances, received a 110-billion-euro joint bailout in May from the EU and IMF.
"We should not underestimate the importance of this crisis which, in Ireland, is mostly coming from the banking sector," IMF managing director Dominique Strauss-Kahn told reporters in New Delhi.
"But I think the decision that has been made will fix the problems in the banking sector, and the Irish economy will come back on track rather rapidly," he added, according to Dow Jones Newswires.
Later in a speech to business leaders, he contrasted the economic vitality of Asia with the sluggish recovery in Europe and the United States, which are still struggling from the effects of the global financial crisis.
"The crisis in Europe is still strong," he said, adding that a number of European countries needed to reduce their public spending deficits to avoid running into trouble. "Even small economies may create a lot of damage."
During and after the global financial crisis, all major world powers stimulated their economies to increase demand and counterbalance the effects of the economic shock caused by the banking sector meltdown.
In most developed countries, this spending was financed through borrowing, leading to large deficits that have begun to worry investors.
"Global recovery is moving along, but is still emerging and fragile," Strauss-Kahn said.
"In parts of the world, in Asia, South America and parts of Africa, growth is going well," he added.
"This has to be compared with what is happening in the US and with the situation in Europe."
Speaking in the world\’s second-fastest growing economy after China, Strauss-Kahn also proposed a radical break from the past in the way the heads of the IMF and its sister organisation the World Bank are selected.
Under an informal arrangement dating back to the formation of the global financial bodies after World War II, Europeans and Americans have always headed both institutions.
Strauss-Kahn is from France and his World Bank counterpart Robert Zoellick is American.
The Frenchman proposed that the next heads should be from neither Europe nor America, Dow Jones Newswire reported.
At the beginning of last month, the IMF executive board agreed to sweeping changes that will give China and other emerging-market economies a greater say in the financial institution.
Strauss-Kahn has been a vocal advocate of giving more weight to emerging nations through their financial contributions to the IMF — effectively making them shareholders — and their positions on the executive board.