The International Monetary Fund cut its forecast for globalgrowth and warned that the European debt crisis threatens to derailthe world economy.

“The epicenter of the danger is Europe but the rest of the worldis increasingly affected,” Olivier Blanchard, the fund's chiefeconomist, said today at a news conference in Washington. “There'san even greater danger, namely that the European crisisintensifies. In this case the world could be plunged into anotherrecession.”

The fund, in an update of its World Economic Outlook report,lowered its estimate for global growth this year to 3.3 percentfrom a September forecast of 4 percent. The expansion next yearwill be 3.9 percent, down from 4.5 percent. The euro area may entera “mild recession” in 2012 as it shrinks 0.5 percent. The U.S.outlook was unchanged at 1.8 percent growth.

The forecasts hinge on increased efforts in the 17-country euroarea to fight the financial turmoil. The IMF called on Europeanpolicy makers to increase the size of the region's rescue fund andfor the European Central Bank to continue its support of the regionto limit contagion to other countries.

Stocks fell as talks over Greek debt restructuring reached astalemate. The S&P 500 dropped 0.2 percent to 1,313.20 at 2:08p.m. New York time, after declining as much as 0.8 percentearlier.

“The near-term outlook has noticeably deteriorated,” the IMFsaid in the report.

Blanchard said the worst could be avoided “with the right set ofmeasures.”

Confidence in Europe's strategy for coping with the crisis wasdealt a setback late yesterday in Brussels when European financeministers pushed bondholders to provide greater debt relief forGreece.

Euro governments sought to fill a deeper-than-expected hole inGreece's finances by saddling investors with a lower interest rateon exchanged bonds, setting up a confrontation in the runup to aJan. 30 European Union summit. At the same time, efforts to shoreup Greece were flanked by headway on a German-inspireddeficit-reduction treaty and indications that a cap on rescuelending might be boosted.

To avoid a 1930s-style worldwide depression, the IMF ManagingDirector Christine Lagarde yesterday called on other countries toplay their part. The IMF, which co-finances loans to Greece,Ireland and Portugal, identified a potential global financing needof $1 trillion in coming years and is seeking $500 billion in newlending resources from its member countries to address potentialloan demand.

Developing Economies

The IMF predicts growth of 5.4 percent in developing economiesthis year, down from 6.1 percent forecast in September, reflecting“the deterioration in the external environment, as well as theslowdown in domestic demand in key emerging economies,” accordingto the report.

China's estimated expansion was cut to 8.2 percent from 9percent. India is expected to grow 7 percent in 2012, 0.5percentage point less than in September forecasts. A forecast forBrazil was lowered by 0.6 percentage point to 3 percent.

Richer nations will expand 1.2 percent this year instead of 1.9percent, the IMF said. Japan is seen growing 1.7 percent, 0.6percentage point slower than four months ago.

The estimated expansion compares with world growth of 3.8percent in 2011 and 5.2 percent in 2010. Economists surveyed byBloomberg News from Jan. 6 to Jan. 11 forecast global expansion of3.4 percent this year and 4 percent in 2013, according to themedian of 72 forecasts.

Italy and Spain's outlooks had the steepest cuts among largedeveloped economies. Italian gross domestic product will contract2.2 percent this year compared with a prior forecast for 0.3percent growth, while Spanish GDP will shrink 1.7 percent comparedwith a previously estimated 1.1 percent expansion, the fundprojected.

Greek and Italian bonds had their worst years on record in 2011as Europe's financial woes intensified, also halting a two-yearrally in equities. The Stoxx Europe 600 Index tumbled 11 percentlast year and the MSCI All-Country World Index slid 9.4percent.

More recently, investor demand for short-term sovereign debtsuch as Spanish and Italian two-year notes has rallied across theeuro area since the ECB issued 489 billion euros ($637 billion) inunlimited three-year loans to euro-region banks last month.

Bond Purchases

The Frankfurt-based ECB also has bought 217 billion euros ofbonds from distressed member countries since May 2010. It kept itsbenchmark interest rate at 1 percent this month following twostraight reductions.

“The ECB should continue to provide liquidity and stay fullyengaged in securities purchases to help maintain confidence in theeuro,” the IMF said in the report.

It also recommended “additional and timely monetary easing” inEurope while more broadly calling for supportive monetary policy inadvanced economies.

The IMF cautioned countries that have fiscal room to maneuver,including in the euro area, against “overdoing fiscal adjustment inthe short term” because it may damp growth further and damagemarket confidence.

That's also a risk in the U.S., where the IMF sees “politicalparalysis” potentially leading to an abrupt unwinding of stimulusspending. Still, the U.S. and Japan need to spell out their plansto reduce debt in the medium term because “neither country can takefor granted its status as a safe haven.”

In advanced economies, “continued adjustment is necessary formedium-term debt sustainability, but should ideally occur at a pacethat supports adequate growth in output and employment,” the IMFsaid in its separate Fiscal Monitor report released today.

The IMF based its forecasts on oil at $99 a barrel, close tocurrent trading prices, and sees non-oil commodities prices fallingby 14 percent this year. Emerging economies need to focus onresponding to weakening domestic demand and slowing externaldemand, the IMF said.

Developing economies where inflation is under control and thathave surpluses, such as China, should boost spending for thepoorest, it said. Countries with less fiscal room including “many”in Latin America should stop raising interest rates.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.