The International Monetary Fund has warned that the flight of capital from struggling eurozone countries could shrink bank assets by trillions of euros.
It is yet another stark warning from the IMF, which is preparing for its twice annual meeting in Tokyo.
A report from the Fund urged European decision makers to strengthen financial ties within the euro area urgently to restore confidence in the global financial system.
The report predicts that European banks are likely to lose 2.2 trillion euros over two years but the worst case scenario puts the outflow at 3.5 trillion and that would have a similarly bleak impact on jobs and investment.
The director of the IMF’s monetary and capital markets department José Viñals said: “Vigilance is necessary and measures are necessary to prevent all financial vulnerabilities so that they do not lead to problems later on.”
A source in the German finance ministry said the EU’s most powerful member would strive to ensure that the European debt crisis was not the sole focus of the IMF meeting.
The latest report from the IMF stressed that the eurozone debt crisis is the main threat to global financial stability, which has weakened in the last six months.