IMF sees 'stagnation' risk for EU, presses policy action

The International Monetary Fund on Tuesday cut its eurozone 2013 growth forecast to minus 0.3 percent from minus 0.2 percent but upgraded next year to 1.1 percent from 1.0 percent as the debt crisis eases.

The outlook, however, remains subdued, it said.

In its latest World Economic Outlook report, the IMF said the scenario for the 17-state eurozone is now one of "diminished crisis risks amid prolonged stagnation," slightly better than its January judgement that "the return to recovery after a protracted contraction is delayed."

The downgrade for 2013, compared with revised figures given in a January update, reflects weaker eurozone periphery countries dragging down their stronger peers, it said.

The fallout from the just-concluded Cyprus bailout could still cause more problems, it added.

In the past six months, "acute crisis risks in the euro area have diminished," the IMF said, highlighting as a major factor the European Central Bank's commitment last year to step into the market and lower borrowing costs for any struggling eurozone member adhering to a recovery plan.

In addition, completion of the new eurozone rescue backstop, the European Stability Mechanism, a late 2012 deal on aid payments to Greece and setting up a Single Supervisory Mechanism (SSM) for banks "have increased confidence in the viability of" the single currency bloc.

Combined with progress in stabilising strained public finances, the IMF said this "has greatly improved financial conditions for sovereigns and banks," the deadly nexus of the debt crisis which the ESM is supposed to address by providing fresh capital for lenders.