The International Monetary Fund said European banks may need tosell as much as $4.5 trillion in assets through 2013 if policymakers fall short of pledges to stem the fiscal crisis, up 18percent from its April estimate.

Failure to implement fiscal tightening or set up a singlesupervisory system in the timing agreed could force 58 EuropeanUnion banks from UniCredit SpA to Deutsche Bank AG to shrinkassets, the IMF wrote in its Global Financial Stability Reportreleased today. That would hurt credit and crimp growth by 4percentage points next year in Greece, Cyprus, Ireland, Italy,Portugal and Spain, Europe's periphery.

“There is definitely a need for deleveraging in Europe,” saidMichael Seufert, an analyst at Norddeutsche Landesbank in Hanover,Germany, with a “negative” rating on the European banking sector.“The danger is that this produced a downward spiral as theregulation gets stricter and stricter and the global economy cools,potentially meaning more writedowns for banks. States in theperiphery are hit hardest.”

The IMF doesn't need to lend money to Spain to help the countrytackle its fiscal crisis, Managing Director Christine Lagardeindicated today.The Washington-based fund earlier this week cut itsglobal growth forecasts and warned of even slower expansion ifEuropean officials don't address threats to their economies.

Asian stocks fell for a third day today on global growthconcerns, with the MSCI Asia Pacific Index down 0.9 percent. TheStoxx Europe 600 Index declined 0.2 percent at 2:14 p.m. inFrankfurt and the euro was little changed, trading at $1.2893.

While the European Central Bank's plan to purchase bonds ofdebt-burdened countries has pushed down bond yields, officials arewaiting for a bailout request from Spain before putting the programinto action.

The European rescue mechanism and the ECB bond program “must beregarded by markets as real, not 'virtual' and should be coupledwith credible conditionality,” Jose Vinals, the director of theIMF's monetary and capital markets department, said in preparedremarks for a press conference in Tokyo today.

ECB President Mario Draghi in July pledged to do “whatever ittakes” to preserve the monetary union, which has been battered by athree-year debt crisis triggered by Greece's hidden budgetshortfall. He said in September that the Frankfurt-based bank maybuy the bonds of nations that submit to the conditions of a rescueloan to lower yields.

'QE-Type' Program

Jose Manuel Gonzalez-Paramo, a former ECB Executive Boardmember, said in an interview in Madrid that the central bank couldoffer more long-term loans such as the three-year operations itintroduced last year or ease collateral rules to feed moreliquidity into the European economy. There's “nothing that preventsthe ECB from executing some QE-type” program, he said, referring toquantitative easing.

Still, Germany's Bundesbank openly opposes Draghi's plan to buybonds on the secondary market, saying it comes too close tofinancing governments. ECB council member Jens Weidmann said in aspeech in Frankfurt today that central banks “have to remainindependent and they have to have a mandate that puts the goal ofstable money ahead of all others.”

Since Draghi's pledge, the yield on Spain's 10-year bond hasfallen from above 7.6 percent to 5.8 percent today. Prime MinisterMariano Rajoy, who meets his French counterpart Francois Holland inParis today, has said he is still weighing up whether his countryneeds a bailout since the ECB's safety net has already offeredinvestors some reassurance and lowered borrowing costs.

Still, governments may find it more difficult to plug theirbudget gaps as the euro-region economy shows signs of a deepeningslump. Euro-area services and manufacturing industries contractedin September and economic confidence dropped. Unemployment held at11.4 percent in August, a record.

“Some people say unless you have skin in the game, meaningmoney, you are not really respected, you are not heard,” the IMF'sLagarde said in a Bloomberg Television interview with Sara Eisen inSendai, Japan. “I am not so focused on that as I am on themonitoring. I think we would rather act in our framework, use oneof the tools that is frequently used, but as I said we can beflexible.”

The fund is helping monitor a 100 billion-euro bailout ofSpanish banks and is co-financing rescue packages for Greece,Ireland and Portugal. While the ECB has said the IMF should beinvolved in overseeing the economic programs of countries askingthe central bank to buy their bonds, the fund's exact role has notyet been defined.

Industrial Output

In France, industrial production unexpectedly increased inAugust, rising 1.5 percent from the previous month, when itadvanced 0.6 percent, French statistics office Insee in Paris saidtoday. Italian output also increased, rising 1.7 percent in Augustfrom July, a separate report showed.

The IMF said that “both Spain and Italy have sufferedlarge-scale capital outflows” in the 12 months through June, with$296 billion and $235 billion, respectively.

“Unless confidence in the euro area is restored, fragmentationforces are likely to intensify bank deleveraging, restrict lending,add to the economic woes of the periphery, and spill over to thecore,” the IMF said.

In April, the IMF forecast asset sales of $3.8 trillion in a“weak policies scenario.” Since then, policy makers' delay intaking decisions to solve the crisis worsened funding pressureswhile the relief provided by the ECB's program of unlimitedthree-year loans faded.

Under a baseline scenario that has governments follow up ontheir commitments, the IMF sees a reduction in bank assets of $2.8trillion, compared with $2.6 trillion in April.

“Intensification of the crisis has manifested itself in capitaloutflows from the periphery to the core at a pace typicallyassociated with currency crises or sudden stops,” the IMF said.“Restoring confidence among private investors is paramount for thestabilization of the euro area.”

Bank deleveraging is being driven by five main factors, the IMFsaid. The impact of weaker earnings and higher asset impairments oncapital level funding pressures from frozen interbank markets anddeclining deposits, growing trend for banks to match loan anddeposit levels in some subsidiaries, pressure to increase domesticgovernment bond holdings at the expense other assets as well asrising sovereign debt spreads.

$600 Billion

So far, the IMF estimates that deleveraging among sample bankshas reached more than $600 billion in the year through June.Progress has been most pronounced among U.K. banks, which have cutnon-core business, French banks, which have reduced U.S.dollar-denominated assets including structured products and Dutchbanks, which have sold subsidiaries in the Americas, the IMF said.Efforts to raise capital cushions have helped strengthen balancesheets and prevent larger asset sales, it said.

Looking at other countries, the report stressed that the U.S.and Japan also face risks to financial stability.

“The present difficulties in the euro area provide a cautionarytale for Japan, given the latter's high public debt load andinterdependence between banks and the sovereign that is expected todeepen over the medium term,” the IMF said.

While emerging markets have managed to weather global shocks sofar, the IMF said many countries in central and eastern Europe arevulnerable to the European turmoil, while Asia and Latin Americaseem more resilient.

In Asian economic releases today, South Korea said its workforceexpanded last month, with the unemployment rate unchanged fromAugust at 3.1 percent. A report on Australian consumer confidencefor October showed sentiment climbed.

Bloomberg News

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