October 23, 2008

The International Monetary Fund (IMF) has warned that more European banks may collapse as traditional sources of capital dry up. The organization, which has 185 member countries, expects sovereign wealth funds and investors to become less enthusiastic about putting money into banks and is predicting that European financial institutions will find their need for government support growing.

In its latest review of the European economy, the IMF considers how stress in the banking sector will feed into the broader economies. It expects every major European economy to enter recession over the coming months and warns that economies such as Denmark, Ireland, Spain and the UK, which have all experienced housing booms, will see the sharpest downturns. Emerging-market economies are also feeling the strain and vulnerable to the downturn because of increased reliance on foreign capital.The report expects the adjustment in the financial sector to be arduous and protracted, with a modest recovery occurring late into 2009.