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IMF Chief: Government Debt Could Stifle Economic Recovery

International Monetary Fund Managing Director Christine Lagarde speaks at a news conference during IMF/World Bank annual meetings at the IMF in Washington, D.C., September 22, 2011.

The head of the International Monetary Fund says economic recovery is still possible, but it is getting harder. In Washington, IMF Managing Director Christine Lagarde said Thursday that troubled economies have fewer resources now than at the start of the 2008 financial crisis.

Lagarde said the world economy is in a dangerous phase and that countries could use the cooperative spirt that helped major economies take action at the height of the financial crisis.

Lagarde told journalists that cooperation is even more important now because many countries have depleted their financial resources coping with slow growth and other economic troubles.

"There is a path for recovery. It is narrower than it was three year ago when we were first hit by the financial crisis, but there is a path for recovery," she said.

Lagarde spoke as finance ministers and central bankers from the IMF's 187 member economies gathered for an annual meeting that also includes talks with the World Bank. She said low-income countries weathered the 2008 crisis better than some of their wealthier counterparts. She offered help from the IMF to rebuild their financial resources to cope with future problems.

The IMF chief said major emerging economies need to move more quickly to find growth from domestic markets rather than from exports. Lagarde said governments in wealthy countries must find the political will to solve debt problems because they pose an economic threat.

"If we look first at the advanced economies, we know there is this heavy debt of sovereigns, households and bank risks that could actually suffocate the recovery," she said.

Problems with Greek debt, for example, have caused turmoil in financial markets as investors worry that a Greek financial default would hurt lenders across Europe. The Greek debt crisis also raises concerns about government debt held by Italy, Spain and Portugal.

The debt crisis hurts employment because it makes bank officials nervous. And worried bankers are less likely to lend the money that businesses need to buy new equipment, expand and hire more workers.

Lagarde said government officials and bankers must find ways to help banks, particularly those in Europe, amass more financial reserves to help cope with future financial shocks. She said that without such help, banks will not be able to do the lending needed to fuel economic recovery and growth.