Two other IMF reports were also released yesterday. The update to the Global Financial Stability Report (GFSR) said that risks to financial stability increased in the second quarter of 2012 because of the continued slow global recovery and fears about the quality of bank assets in Europe. An update to the IMF’s Fiscal Monitor said that fiscal adjustment in both advanced and emerging economies is proceeding as expected. The latest World Economic Outlook projects that the global economy will grow 3.5 percent this year, down 0.1 percentage points from the April forecast, and 3.9 percent in 2012, 0.2 percentage points lower.

“More worrisome than these revisions to the baseline forecast is the increase in downside risks,” said Olivier Blanchard, the IMF chief economist and director of the IMF’s Research Department, which prepares the WEO.

The IMF emphasized that the relatively minor setback to the global outlook under its baseline projections is based on three important assumptions: that there will be enough policy action for financial conditions in the so-called euro area periphery, which includes Greece and Spain, to ease gradually through 2013; that U.S. fiscal policy does not tighten sharply in 2013; and that steps by some major emerging markets to stimulate growth gain traction.

The IMF said the most immediate risk to the global recovery is that delayed or insufficient policy action will further escalate the euro area crisis. “Simply put, the euro periphery countries have to succeed,” said Blanchard.

In the Fiscal Monitor Update, IMF refers to Greece as follows: “…the recent deterioration in the political and economic climate in Greece serves as a warning about the potential onset of “adjustment fatigue,” which remains a threat to continued program implementation.

The situation in Greece remains fluid. Macroeconomic deterioration and uneven reform implementation have weighed on revenues this year, while financing constraints are leading to under-execution of budgeted expenditures. Absent further policy changes, the primary deficit would trend towards 11⁄2 to 2% of GDP, versus the 1% foreseen at the time of the Extended Fund Facility (EFF).”