Asia's Response

In Asia, policy makers need to respond nimbly should conditions worsen, Lagarde said today. They "can ease off the fiscal brakes, draw on reserves or regional reserve pooling arrangements, and reactivate central-bank swap lines," she said. Lagarde cited high unemployment in advanced economies and economic and financial market declines that reinforce each other as concerns.

"If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand," Lagarde said in her prepared text. "Ultimately, we could face a lost decade of low growth and high unemployment."

Japan's so-called lost decade during the 1990s saw the economy slip in and out of recession and grow at an average rate of about 1 percent a year after the collapse of a real-estate bubble.

In Asia, "countries need to prepare for any storm that might reach their shores," Lagarde said. At the same time, a balancing act is required, because "some face continued overheating pressures and risks to financial stability from prolonged easy financial conditions."

'Right Direction'

Lagarde said plans by leaders of the euro-area economies and Group of 20 nations over the past month to increase a rescue package for Greece were a "step in the right direction" to resolving Europe's debt crisis.

The enlarged European Financial Stability Facility should be able to start raising funds in December, she said.

European finance ministers meeting in Brussels this week pledged to roll out the bulked-up rescue fund next month after consulting investors and credit-rating companies over two options for translating the fund's 440 billion euros ($607 billion) in guarantees into as much as 1 trillion euros of spending power.

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