Sliding Toward Financial Crisis

Stella Dawson

Three years after the collapse of Lehman Brothers, the world's financial system is sliding toward another major crisis. At stake is the global recovery and future shape of Europe. Calls are mounting for financial leaders of the world's biggest economies meeting this week to take bold action, not on the scale of the $1 trillion rescue package of March 2009 but something equally important in policy terms.

The challenge for the Group of 20 talks in Washington on Thursday and Friday is to prevent a sovereign debt crisis centered in Greece from turning into a full-blown banking crisis. Such a crisis could engulf other indebted European countries, lead to messy defaults and plunge the region and world back into economic and financial turmoil.

The final ingredient is the political resolve to stick to this package of programs. Eswar Prasad, senior fellow at the Brookings Institution, said the job of the IMF this week is to nudge countries in this direction and highlight serious dangers ahead. "The alternative is political paralysis, which we are seeing in many of these countries and could lead to very substantial risks for the longer term. And that's the big concern," he said.

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