The International Monetary Fund said today that the European Union has little time left to resolve sovereign debt problems, amid rising concerns among investors and the public.
'Policymakers must act now to make the financial system more robust,' the IMF said in a report issued in Sao Paulo.
'The current window of opportunity to prepare the financial and economic system against potential systemic shocks, importantly by providing clarity on euro area-wide solutions to strains in the periphery, could close unexpectedly,' the fund said.
It noted that concerns about debt sustainability and support for adjustment efforts in the euro zone periphery had intensified, in an update of its April Global Financial Stability Report.
'Credit default swap spreads have risen to new highs in Greece amid concerns over the degree of political resolve that will be needed to implement adjustment and secure needed funding,' it said.
The IMF highlighted that worries about the bailed-out euro zone economies of Greece, Ireland and Portugal have renewed the market's focus on the potential for contagion of shocks to banks.
Banking systems in core European countries, such as Germany and France, still have large exposures to peripheral countries, and the pace of banking system repair has been too slow, it warned.
A market shock could come from an un unexpected sudden pickup in risk aversion that 'leads market participants to narrow their tolerance for incomplete policy solutions.'
'It could also be closed by political developments, either because adjustment programs lose political support in debtor countries, or because populaces in creditor countries lose patience in continuing to finance those programs,' the Washington-based institution said.
'Thus, a more robust financial system, notably in Europe, is needed to gird against shocks,' it said.
Global economy has hit a speed bump
The International Monetary Fund also said today that global economy has hit a speed bump and warned the US and Europe to get their fiscal houses in order to maintain momentum.
'Activity is slowing down temporarily' amid rising negative growth headwinds, the Washington-based lender said.
'Greater than anticipated weakness in US activity and renewed financial volatility from concerns about the depth of fiscal challenges in the euro area periphery pose greater downside risks,' the IMF said.
The Fund lowered its 2011 growth forecast a notch, projecting an annual rate of 4.3%, a tenth of a point lower than it had forecasted two months ago.
The International Monetary Fund also joined calls for the US Congress to raise the country's debt limit, warning that failure to act would risk a major global market upheaval.
'For the US, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform,' the IMF said.
The US government hit its legal borrowing limit of $14.29 trillion on May 16. The Treasury has taken extraordinary technical measures to avert a debt default, but says it will run out of maneuvering room by August 2.
The issue of raising the debt limit is bogged down in Congress, where President Barack Obama's Democrats are at loggerheads with Republicans, who control the House of Representatives.
'Should Congress prove unwilling to raise the debt ceiling, there would be a risk of a major adverse market reaction,' the IMF said.
