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IMF blasts eurozone crisis response, warns of deflation risk
Published in Saudi Press Agency on 18 - 07 - 2012

The eurozone risks falling into deflation, the International Monetary Fund (IMF) warned on Wednesday, blasting the currency bloc's institutions for their insufficient response to their
debt crisis, according to dpa.
Deflation - occurring when the inflation rate falls below zero -
is seen as an economic liability because it discourages borrowing and
investment and makes life harder for debtors - a scenario that would
badly hurt eurozone strugglers like Italy, Spain or Greece.
In the eurozone, there is "about a 25 per cent probability" of it
happening by early 2014, the IMF wrote in its annual staff report on
the currency bloc.
The risk of deflation "is relatively low" in healthier economies
like Germany, "but significant" in peripheral countries where it
would be most damaging, the IMF said, stating that tax hikes "are
masking more severe downward price pressures" in places like Italy.
Earlier this month, the European Central Bank (ECB) cut interest
rates to a historic low of 0.75 per cent - a step that normally
increases inflationary pressures, thus reducing the likelihood of
deflation. But the IMF urged it to do more.
It advised the Frankfurt-based body to cut rates further, engage
in quantitative easing, provide more liquidity to private banks, ease
collateral rules for loans or buy more sovereign bonds of vulnerable
eurozone countries.
But the ECB is reluctant to go down that road. "With policy rates
at historical lows, the ECB remains cautious on the benefits of
further easing," the IMF report indicated.
The ECB does "not expect strong disinflationary pressures," noting
that a falling euro exchange rate could fuel new price rises; but it
could countenance taking bolder steps "to prevent further contagion
should the crisis escalate," the IMF said.
The IMF also insisted on structural reforms, noting that
far-reaching measures on labour and product markets, taxes and
pensions "could raise (eurozone) output by 5 per cent over 5 years."


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