Europe’s debt crisis will have huge ramifications – IMF

It also urged Eurozone leaders to bolster the region’s rescue fund and recapitalise its banks.

“It would be very costly not just for the Eurozone but for the global economy to delay tackling the sovereign crisis,” Luc Everaert, Division Chief for Euro Area Policies in the IMF’s European Department said.

In a staff report, the Fund recommended that the European Financial Stability Facility (EFSF) should be increased in size and be allowed to purchase debt on the secondary market, as a means of easing the threat of contagion from Eurozone peripheral states.

“European banks need to be strengthened throughout the Eurozone area, with a very strong follow up to the stress tests that just came out and with a preference for private sector solutions,” Mr Everaert said.

The Fund also recommended the Eurozone needed to adopt much stronger economic governance. “We need more Europe not less,” Mr Everaert added.

But German Chancellor Angela Merkel confounded expectations of any comprehensive solution to Greece’s debt crisis.

“Further steps will be necessary and not just one spectacular event which solves everything,” Ms Merkel said at an emergency Eurozone summit.

The widespread longing for a single, final solution to make the Greek crisis disappear once and for all was unrealistic, she said, as officials wrestled with complex options for involving private bondholders in a second financial rescue for the debt-stricken Eurozone state.

The euro eased against the dollar after the German leader said too high demands had been placed on the talks, which was only part of an incremental series of steps to address Greece’s debt and competitiveness problems.

The European currency area is facing the biggest crisis of its 12-year existence, with contagion threatening major economies such as Italy and Spain after three small members – Greece, Ireland and Portugal – needed bailouts.