IMF warns Asia of spillovers from European crisis

Chandi Dharmaratne

SINGAPORE, June 9, 2010 (AFP) – The IMF warned Asia Wednesday of the potential spillovers of the European debt crisis, saying it could dampen trade, make capital flows volatile and overheat economies in the region. Greece is at the epicentre of a mounting debt crisis that threatens to spread across the eurozone and has pulled down the euro to four year lows. Asian markets have also been affected by the impact of the crisis.

Shinohara said there was a risk that sovereign debt problems being experienced in some eurozone countries could spill over to others.

He said the strong fiscal position of most Asian economies provided the “space” to respond flexibly to the European crisis.

“In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus.” “Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,” IMF deputy managing director Naoyuki Shinohara told a forum in Singapore.

On the financial front, he said major credit problems could result in a “significant spillover” through funding channels, especially where banks were dependent on wholesale funding.