BusinessDesk: 'The epicentre of the danger is Europe but the rest of the world is increasingly affected': IMF

Equities dropped after the International Monetary Fund slashed its forecast for global economic growth and European Union finance ministers rejected a debt swap deal between Greece and its private bondholders, saying the latter needed to take greater losses.

In Europe, the Stoxx 600 Index closed with a 0.5 percent loss for the day.

Wall Street also declined. In early afternoon trading in New York, the Dow Jones Industrial Average dropped 0.37 percent, the Standard & Poor's 500 Index fell 0.26 percent and the Nasdaq Composite Index slipped 0.04 percent.

The International Monetary Fund warned that Europe's debt crisis could crimp the world economy even further as it lowered its 2012 forecast to 3.3 percent from 4 percent. It forecast global growth would pick up to 3.9 percent in 2013.

If Europe failed to contain its crisis, growth this year would come in about 2 percentage points below its current estimate, according to the IMF.

“The epicentre of the danger is Europe but the rest of the world is increasingly affected,” Olivier Blanchard, the fund’s chief economist, told a news conference in Washington. "There’s an even greater danger, namely that the European crisis intensifies. In this case the world could be plunged into another recession.”

Investors remain optimistic that progress is being made on resolving the euro zone's crisis, even as EU officials yesterday rejected the demand of Greece's private creditors for a 4 percent coupon on new, longer-dated bonds in exchange for existing debt, according to Reuters.

Greek Finance Minister Evangelos Venizelos said the Greek government plans to conclude debt-swap talks with private investors by February 1. Under an agreement drawn up in October to bail out Greece for a second time, avoiding a default, bondholders would take a 50 percent writedown on the notional value of their Greek holdings.

"They don't seem that far apart, I don't think anyone is really discounting that is going to blow up. At this point, people think they are going to come to some resolution.

hey have to get the pin back in the hand grenade somehow," Stephen Massocca, managing director at Wedbush Morgan in San Francisco, told Reuters.

Financial shares dropped on both sides of the Atlantic. In Europe, shares of Societe Generale and Credit Agricole fell after Standard & Poor's lowered their credit ratings following last week's downgrade of France's sovereign rating. On Wall Street, bank shares also fell, including Citigroup and Bank of America.

Also declining were shares of Verizon Communications and McDonald's after the companies posted their quarterly results. Shares of Johnson & Johnson and DuPont rose following the release of their earnings.

Investors will look to President Barack Obama's State of the Union address before a joint session of Congress tonight.

Obama is expected to push tax breaks for bringing manufacturing jobs home from overseas, ideas to help the troubled home-mortgage market and incentives for alternative energy development, Reuters reported, citing people familiar with the speech.

Tomorrow the Federal Reserve will release the outcome of its two-day policy meeting that began today.

(BusinessDesk)