Europe’s weakened economy is now the central threat to global recovery, as countries there struggle with heavy debt, banks face a reckoning over their lack of capital and growth is slowing, the International Monetary Fund said Wednesday in its first assessment of the world economy since a crisis over government borrowing in Greece.

While the agency estimated that growth in the United States and emerging Asian and Latin countries remains on track, it scaled back projections for Europe and outlined a series of issues on the continent that could — unless controlled — spark problems rivaling those of the 2008 collapse of Lehman Bros.

In updating its World Economic Outlook, the IMF slightly raised its overall forecast for global growth, to 4.6 percent for the year compared with 4.2 percent in its April report.

The IMF said it also expected the United States to grow slightly faster than earlier predicted — about 3.3 percent this year and 2.9 percent next year — but the outlook for Europe was reduced to just 1 percent this year and 1.3 percent in 2011.

The report emphasized how a problem that was considered limited in scope when it surfaced in Greece last fall eventually expanded, causing governments throughout Europe to cut spending and overhaul social programs in an effort to curb record levels of debt.

The issues of government debt and the health of the banks are related: European banks own tens of billions of dollars in Greek, Spanish and other government bonds.

The European banking system is plagued by a “legacy of unfinished cleansing,” the IMF said, which has left “pockets of vulnerability, overcapacity, and poor profitability.” Banks have become hesitant to lend to each other — much as happened during the U.S. financial crisis — and are relying on an ultimately unhealthy mix of short-term loans from the European Central Bank to ensure they have enough cash.

 


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