IMF warns over sovereign debt

In a warning that will chill finance ministers in economies with large government borrowings - including the UK - the IMF has warned that the burgeoning volume of government debt has overtaken the health of the financial sector as the largest single risk to the world economy.

The IMF also says the total cost of writedowns from the crisis is now likely to be around $2.3 trillion (£1.5 trn), down from an estimate of $2.8trn last autumn. About 39 per cent of the writedowns were in US banks, 29 per cent were in the euro area, and 20 per cent in the UK.

In its Global Financial Stability Report, the Fund said governments need "credible, medium-term" plans to reduce deficits. "The deterioration of fiscal balances and the rapid accumulation of public debt have altered the global risk profile. Vulnerabilities now increasingly emanate from concerns over the sustainability of governments' balance sheets."

José Viñals, the director of the IMF's monetary and capital markets department, added that: "Greece is a wake-up call. In all the other countries, which fortunately are in a better situation, what we are saying is, 'Do not let the financial situation get out of hand, and undertake the necessary measures precisely to remain on the safe side'."

However, the IMF also reported that the global recovery has "gained steam", and risks to the financial system have subsided. The Fund is due to release its UK forecast today.