Eurozone debt crisis ‘in dangerous new phase’ warns IMF chief

Τι έγραψαν τα ξένα μέσα • Central banks to pump cheap dollars to European banks• Lagarde says ‘political dysfunction’ could wreck recoveryPhillip Inman, economics correspondentguardian.co.uk, Thursday 15 September 2011 15.52 EDTArticle historyInternational Monetary Fund head Christine Lagarde described a vicious circle of weak growth and weak balance sheets fuelling a crisis of confidence. Photograph: Michael Reynolds/EPAInternational Monetary Fund chief Christine Lagarde has warned that a “vicious circle is gaining momentum” in Europe and the US that could wreck attempts at a recovery and undermine rescue operations for Greece and other indebted EU countries.She said “political dysfunction” was feeding policy indecision in a “dangerous new phase of the crisis” that could make a delicate situation harder to resolve.Her comments, most of which were directed at eurozone’s chief policymakers, came as the world’s major central banks agreed to provide unlimited dollars to European banks to prevent a rerun of the Lehman Brothers collapse three years ago.The Bank of England joined the Bank of Japan, the US Federal Reserve and the European Central Bank in a joint mission to provide dollars more cheaply than international money markets.Stock markets reacted positively to the initiative, with the FTSE up 2% at 5337 and the German Dax and French CAC both up 3%. Banking stocks rose sharply, with BNP Paribas up as much as 22%.Many of Europe’s weakest banks are expected to make use of the funds after finding their access to dollar loans cut off in recent months. US institutions withdrew loan facilities while the Greek situation remained unresolved, analysts said.The European commission added to the gloomy outlook after it said the economic situation would deteriorate towards the end of the year with growth slowing to a standstill in the last quarter. It cut its 2011 growth forecast for the UK to just 1.1% from the previous estimate of 1.7%.Lagarde, the former French finance minister, repeated her warning that eurozone banks vulnerable to a Greek default needed to boost their capital.French banks have come under the spotlight following an unprecedented lending spree to the Greek government and Greek banks. A default by Greece on its debts would leave them with a large hole in their finances. Société Générale has a total exposure to Greek government and commercial debts equal to €6.6bn (£5.7bn), and BNP Paribas has €8.5bn, according to their disclosures to the European Banking Authority. Crédit Agricole has a total exposure of €27bn.Insurance policies sold by French banks in the form of credit default swaps (CDSs) could also result in large losses. Many of the CDS contracts offered by French banks have, in turn, been insured with other eurozone banks, which could be dragged into a crisis by the need to honour these as well as absorb their own losses on loans to Greece.Echoing analysts who argue the core problem for the eurozone is the lack of reserves to buffe