The risks to global growth are increasing, which may prompt the International Monetary Fund to forecast a recession for Europe this year, according to Zhu Min, deputy managing director of the IMF.
"In the past few months, we've observed clearly that economic activity has been weakening, the prospect of growth has dimmed," Zhu said in a speech in Singapore on Thursday.
He warned that if the current financial situation in the euro zone continues to deteriorate, it could drag down global gross domestic product growth (GDP) by 2 percentage points from the baseline IMF estimate of GDP growth of 4 percent in 2012, which it released in September.
Zhu said the heightened volatility in the financial markets was one of the biggest challenges facing policymakers and said he expected the market swings to continue.
"Because the U.S. lost its triple-A level rating level and because the global risk portfolio changed dramatically, all the financial institutions are repricing their assets, repositioning their risks, repositioning their balance sheets. We observe the global assets in a massive restructuring," he said.
According to Zhu, the process of deleveraging among financial institutions was overdue should have happened after the global financial crisis in 2008. "We will see adjustments of the debt level to the income level to the asset level. To pair them together will take a long time to process," he added.