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Business

Europe Is Heading Toward Recession, Says IMF

Europe is nearing recession and its banking system faces "extraordinary financial stress" that will not ease quickly, the IMF said as the Benelux countries agreed Thursday to absorb flailing bank Dexia's toxic assets.

Sign reading 'Rezession'

Despite appeals to optimism, recession could hit Europe

Economic growth in the 15 countries using the euro is facing a slump, decreasing from an average 1.3 percent this year to 0.2 percent in 2009; unemployment will increase from 7.6 percent to 8.3 percent, an IMF report said Wednesday, Oct. 8.

IMF analysts also predicted that Germany, Europe's largest economy, will stall in 2009 and France's will grow by a marginal 0.2 percent. Italy and Spain will see their economies shrink by 0.2 percent, according to the semi-annual World Economic Outlook.

With European nations "moving close to or into recession," the IMF urged forceful action by policymakers to combat the crisis with measures such as lower interest rates.

ECB chief: "collect yourselves"

Stock trader holding his head

Wall Street dropped even after the Fed announced interest rate cuts

Hours before the report's release, the European Central Bank and the US Federal Reserve led key central banks in a coordinated emergency cut in benchmark rates by 0.5 percentage points.

European Central Bank Chief Jean-Claude Trichet called the move "a significant signal of confidence to the markets." Speaking on France 3 Television, he told viewers, "We can say to the markets we have regained control over price stability in the medium term."

Markets continued to fall nevertheless, with Wall Street down more than two percent, London and Frankfurt more than five percent, and Paris more than six percent.

"We all together call upon the market participants who are in this state of intense turbulence, we tell them to collect themselves, there are elements of confidence out there," said the ECB chief, ahead of the annual meetings of the IMF and World Bank to be held this weekend in Washington. "Excessive pessimism is ill advised."

On a brighter note, the IMF said falling real estate prices in Europe are less likely to set off a major housing-related credit crunch than in the US. Higher savings rates, lower debt, more prudent mortgage lending and much more limited opportunities for equity withdrawal on real estate work in Europe's favor, the report said.

Woman standing in room with furniture on ceiling

Prudent lending practices in Europe have kept the housing market from turning upside down

The downturn in residential real estate will, however, have "an appreciable short-term impact" in countries like Ireland, Spain and Britain. Austria, Germany and Switzerland appear the least at risk in that respect, the IMF said.

Appeal to European policymakers

Still, the IMF appealed to EU governments to move "toward more joint responsibility and accountability for financial stability" and urged European policymakers to make prudent choices.

"Restoring confidence now requires a decisive commitment to concerted and coordinated action to alleviate financial stresses and avoid the serious risk of backtracking on European financial integration," IMF analysts said.

Euro zone governments, whose deficit spending is limited by rules meant to protect the euro's value, should focus emergency injections "on measures to stabilize the financial sector, as needed," the report said.

EU finance ministers, scrambling to react to the spill-over, agreed Tuesday to more than double the public guarantee for private bank deposits to at least 50,000 euros ($68,000).

Dexia gets relief from Benelux

Meanwhile, the governments of Belgium, France and Luxembourg have agreed to a plan to help the struggling bank Dexia, Belgium's Le Soir newspaper reported Thursday. The plan would create a special vehicle to absorb the bank's toxic assets and provide fresh liquidity.

Building with Dexia logo

Shares in Dexia have fallen more than 70 percent in the last year

"There will be a public guarantee from the French, Belgian and Luxembourg states on a maximum 4.5 billion euros that Dexia is going to borrow on the market," a source close to the Luxembourg government told AFP news agency.

The move comes despite a 6.4 billion euro bailout package that the three governments put together for Dexia last week. The idea of splitting the bank into national units was abandoned at talks between high-ranking officials from France, Belgium and Luxembourg that were being held through the night in Brussels, according to Le Soir.

Dexia's shares rose sharply on the news, climbing 18 percent in the first 15 minutes of trading on Thursday. The Franco-Belgian bank is one of the top 20 banks in the euro zone, with some 5.5 million clients in Belgium, France, Luxembourg, Slovakia and Turkey.

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