The International Monetary Fund has urged countries that share the Euro to make rapid progress towards a banking union and to sort out the region’s banking problems, which are holding back a full global recovery.

The IMF forecasts global economic growth at 3.25% this year and 4% next year, led by strong growth in emerging economies in Asia and South America.

The US is predicted to lead recovery among the advanced economies, with growth forecast at just under 2% this year and 3% in 2014.

Negative growth in Euro area

But the IMF said the Eurozone, mired in bailouts and austerity will record negative growth this year which it blames on problems in the banking sector.

Avoiding the breakup of the euro were hailed by the fund as a successful defusing of two of the biggest threats to the global recovery, but it warned of old dangers remaining, and new ones emerging.

The IMF report contrasts the more rapid recovery in the US – where the emphasis was on fixing the banking sector, but which allowed government debt to rise – compared with the EU, where the opposite was the case.

It says “relative to US banks, Euro Area banks have made less progress in rationalising their balance sheets, cutting administrative costs, and rebuilding profitability and capital. In addition they remain too dependent on wholesale funding.”

Households need restructuring assistance

In a point that will have particular resonance in Ireland, the IMF says that “households and non-financial companies (corporate) are likely to require some help in restructuring debts to banks, compared with targeted restructuring policies, traditional bankruptcy has many drawbacks in a deep downturn”.

It urges policymakers to consider “viable alternatives to default and closure, while avoiding distortions to competition from zombie enterprises”. It says debt for equity swaps and working capital support could be considered