Debt threatens Europe's recovery

Europe's economic outlook has grown more uncertain as Greece's debt troubles threaten to spill over to other vulnerable countries, the International Monetary Fund said in a report released on Wednesday.

"In the near term, the main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion" the IMF said in its World Economic Outlook.

The Fund, which sent a team to Athens this week to discuss fiscal policies, said a financial support package agreed by European countries, the European Commission and the European Central Bank was a "welcome and important step" towards making sure Greece's problems don't lead to financial instability.

The Fund kept its 2010 gross domestic product growth forecast for the euro area unchanged at 1 percent, and trimmed the 2011 growth forecast to 1.5 percent, one-tenth of a percentage point below its January estimate.

For Britain, it maintained its 2010 GDP growth estimate of 1.3 percent, and cut its 2011 forecast to 2.5 percent from 2.7 percent.

The IMF also expressed concern about the need to adjust fiscal and current account imbalances, and said in some cases, large deficits needed to be reversed "promptly" to address concerns about debt sustainability. In addition to Greece, it put Ireland, Portugal and Spain in that category.

"Although resolving these imbalances is expected to dampen growth, delays in taking decisive policy action could lead to a protracted process punctuated with occasional crises" it said.

The Fund said monetary policy should remain "highly accommodative" in most cases because recovery prospects were still sluggish and inflation pressures subdued.

It also said unresolved banking problems would likely hamper the credit supply as financial firms purge debt and build up capital buffers to absorb additional writedowns.