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WASHINGTON (Reuters) -The International Monetary Fund on Thursday warned of a more severe economic downturn unless governments move aggressively to fix the financial system by removing troubled assets from banks' books.
In a report prepared for a meeting of Group of 20 developed and developing countries, the IMF noted policymakers had taken steps to address the crisis but said further action was needed.
"Policy actions to resolve the financial crisis have been broad in scope, but have not yet achieved a decisive breakthrough," it said.
"If the financial sector is not restored to health, an enduring recovery will not be possible," the Fund added.
Restoring the financial system will require not only central banks pumping more money into the system, but also dealing aggressively with bad bank debt, and recapitalizing healthy banks.
The Fund said purging the banks of the bad debt by transferring toxic assets into a "bad bank" would be costly but such steps have been tried and tested in previous crises and worked.
It warned that credit conditions remain "seriously impaired" and that financial losses are mounting.
"Action is needed on two fronts -- to restore financial sectors to health and to bolster demand to sustain a durable recovery in global activity," the fund added.
Reporting by Lesley Wroughton; Editing by James Dalgleish