The eurozone should have a bigger rescue fund and the European Central Bank should boost its bond buying to prevent the sovereign debt crisis from derailing economic recovery, an IMF report obtained by Reuters said.
International Monetary Fund chief Dominique Strauss-Kahn will present the report on the economy of the 16 countries using the euro at a meeting of eurozone finance ministers and European Central Bank President Jean-Claude Trichet on Monday.
"The recovery could still stay the course, but this scenario could now easily be derailed by the renewed financial market turmoil," the IMF report said. "The sovereign and financial market storm affecting the periphery (of the eurozone) constitutes a severe downside risk," it said.
The IMF will tell the ministers that while last week's 85 billion euro ($114.1 billion) joint EU/IMF rescue package for Ireland and plans for a permanent mechanism for crisis resolution including the private sector are welcome, they are not enough.
"There is also a strong case for increasing the resources available for this safety net and making their use more flexible, including for the purpose of providing more effective support to banking systems," the report said.
The eurozone now has a fund totalling 750 billion euros to help governments cut off from financial markets in exchange for fiscal austerity and reforms.
To prevent borrowing costs of countries like Portugal or Spain from rising too high, the ECB has been buying their bonds on the secondary market, but the purchases have been moderate compared, for example, to similar moves in the United States.
The ECB's extraordinary liquidity provision and its securities market program, as well as the EU's extended state aid framework for bank support, would need to remain in place and indeed be expanded until systemic uncertainty receded, the IMF said. Eventually they should be removed gradually to avoid the return of unexpected market pressures.