October 9, 2008 / 10:26 AM / 11 years ago

UPDATE 1-Recession may become central scenario-Almunia

(Adds comments on economy, coordination)

MADRID, Oct 9 (Reuters) - Recession may become the main scenario for Europe going forward and coordinated monetary policy and rescue plans are the way ahead in the banking crisis, EU Monetary Affairs Commissioner Joaquin Almunia said on Thursday.

“The risk of recession, unfortunately, might become the central scenario,” Almunia told a conference in Madrid at which he said the solvency of the world financial system was in question.

“When necessary we have to recapitalize banks, use rescue plans and ask central banks to keep acting in a coordinated fashion in monetary policy and liquidity provision, so the system can start working again,” he added later.

Major central banks cut interest rates by up to half a percentage point on Wednesday in a coordinated attempt to shunt the world’s developed economies out of a financial crisis brought on by toxic assets and a collapse of trust among banks.

The commission’s leading official on economy, Almunia said volatility in financial markets remains extraordinarily high despite a series of government bank bailouts, mergers and systemic rescues like the Paulson plan.

He said the crisis is hitting the euro zone’s real economy, creating high levels of uncertainty after nearly all second half economic indicators were negative.

But he said he saw government bank interventions as temporary and did not expect savers in any country to face an outright bank collapse, which would be covered by euro zone bank deposit guarantees.

“This is an instrument that solves a problem but it’s not going to be used,” he said of the guarantees.

He also said upcoming meetings of the G7, IMF and EU leaders would likely seek more coordinated responses but said it was difficult to say when the crisis might end.

Reporting by Andrew Hay; editing by Patrick Graham

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