Pan-European banks' ability to lend could well be diminished by the credit crunch and cause major damage to economic growth, a senior International Monetary Fund official said this afternoon.
"There is a significant risk that the ability to lend by pan-European banks will take a sharp knock and lead to significant slowdown in growth," Michael Deppler, head of the IMF's European department, said.
This week Germany's WestLB bank became the latest European lender to suffer from financial market turbulence following problems with in the US subprime mortgage market.
In mid-October the IMF forecast growth in the 13-nation euro zone at 2.5 per cent this year and 2.1 per cent in 2008.
Deppler also said the extent of further potential fallout on European banks from the U.S. subprime mortgage-related crisis remained unknown.
"That is a key issue and we don't know the answer," he said.
"That's clearly the key risk that's out there, the key uncertainty that's out there."
Deppler was in Brussels to present the IMF's inaugural twice-yearly economic outlook for Europe at the Centre for European Policy Studies think tank.
The outlook was first published on Monday and Deppler reiterated that Europe was better placed to weather financial turmoil than the United States.
"It's clear that European banks hold and have held significant amounts of US-based structured products. Those losses have to be worked through the system," Deppler told the seminar.
The subprime problem has "gotten amplified", he said.