Story highlights

IMF: Mounting risks, eurozone worries are fueling financial instability

Governments need to do more to raise market confidence or risk a banking credit crunch

IMF economist: U.S. fiscal cliff and eurozone crisis greatest risks to the world economy

The IMF downgraded its 2012 global growth forecast to 3.3% earlier this week

(CNN) —  

Falling market confidence has led to money fleeing peripheral eurozone nations such as Spain and mounting pressure on banks, raising the risks of a credit crunch and recession, the International Monetary Fund said in a report released Wednesday at meetings in Tokyo.

While moves in September by the European Central Bank to buy government bonds have helped stabilize markets, governments need more action to return market confidence, according to the IMF’s Global Financial Stability Report. “If they do not, the result will be an acceleration in deleveraging, which raises the risk of a credit crunch as banks make fewer loans, and an ensuing economic recession,” the IMF said.

The report comes after the chief economist for the IMF told CNN Tuesday that there are two great threats to the global economy: the “fiscal cliff” in the United States and the eurozone debt crisis.

“I think a (global) recession is not very likely except for two possible tail risks: The first one is a possible fiscal cliff in the U.S. If for some reason we actually jump all the way down the cliff, this would be an enormous fiscal contraction,” said Olivier Blanchard, IMF economist. “It would be a U.S. recession, and God knows what would happen to the world.”

The U.S. fiscal cliff refers to $7 trillion worth of tax increases and spending cuts that start taking effect in January.

CNNMoney Explainer: What is the fiscal cliff?

“The other which has a slightly higher probability is if the Europeans don’t quite get their act together,” Blanchard said. “They have promised a number of things, they have started putting in place a number of things, but whether they implement it is not absolutely sure.”

Markets were buoyed last month after European Central Bank president Mario Draghi outlined the details of a plan to buy euro area government bonds, reiterating his pledge to do “whatever it takes” to preserve the euro.

The move was aimed mainly at Spain and Italy, which struggled with unsustainable borrowing costs earlier this year. So far, neither Madrid nor Rome has officially requested support from the bailout funds.

Greece, Portugal and Ireland – much smaller eurozone economies – have received aid to help offset crippling borrowing costs due to ballooning sovereign debt in the wake of the 2008-2009 financial crisis.

The IMF on Monday revised its global growth prediction to 3.3% this year, down from 0.2% in July, saying the global recovery “has suffered new setbacks, and uncertainty weigh heavily on the outlook.” The IMF also revised its predicted growth to 3.6% in 2012, down from its previous forecast of 3.9%.

CNN’s Andrew Stevens and CNNMoney’s Charles Riley and Ben Rooney contributed to the report