UK exposed to eurozone shocks, warn IMF chiefs
Uk bank exposure to debt-laden countries has left Britain's economic recovery highly vulnerable to shocks in the eurozone, the International Monetary Fund (IMF) warned.
The IMF said banks could be hit by further woes in troubled countries such as Greece, Ireland and Spain - with UK bank loans to these eurozone members accounting for around 14% of gross domestic product (GDP).
But the IMF's latest report on the UK confirmed the economy was "on the mend" and supported the Government's actions.
It is forecasting growth of 1.7% this year - up from an earlier prediction for growth of 1.2% - and maintained its GDP outlook at 2% in 2011, despite government spending cuts.
The IMF said there was likely to be only a "moderate dampening of near-term growth" from the deficit-busting cuts.
However, it cautioned of a "key underlying vulnerability" given UK bank exposure to Europe and Ireland in particular.
"Negative shocks in any of these markets could necessitate further write-downs and weaken UK banks' capacity to support the domestic economic recovery with adequate credit supply," it said.
"Additional spillovers could arise from the important role that foreign banks play in the UK," added the IMF.
Irish banks in the UK account for 7% of corporate loans and 3% of household loans, it noted.
Further financial stress in these countries could have "noticeable effects on the UK economy", warned IMF chiefs.
The IMF said the Bank of England should pump more money into the economy through quantitative easing (QE) if the recovery stalled enough to impact the inflation outlook.
But, on the other hand, interest rates should rise gradually if the recovery bounds ahead.
The IMF also gave a word of caution to the Government, saying it should be ready to rein in spending cuts. "In the unexpected case of a significant and prolonged new downturn, some directors considered that the pace of structural fiscal consolidation could be adapted," it said.