Europe must do better in cleaning up its banking sector should the continent have any hopes for recovery from a devastating recession, the International Monetary Fundwarned amid signals that some of the continent’s economies may be pulling back from the brink. Marek Belka, head of the IMF’s Europe department, said the European Central Bank still had “some room” to lower interest rates - currently at 1.5 percent - and called on governments to coordinate in taking toxic mortgage assets out of the region’s struggling banks. For monetary or fiscal moves to make a real difference, “Europe needs to move rapidly to clean up its financial sector problems,” Belka told reporters in Washington, ahead of a semi-annual gathering of the IMF’s members. “It all depends on how efficiently we clean out banks.”

While a recession gripping nearly all the world’s economies may have started in the United States, Europe has been especially hard hit by the fallout from both the financial crisis and a collapse in global trade. The IMF earlier slashed its growth forecast for the 16- member Eurozone by another one percent to a 4.2 percent drop in 2009, with the bloc managing to pull back to a 0.4 percent decline in 2010.

Growth in emerging economies, including Central and Eastern Europe as well as Turkey, will tumble 3.7 percent this year before rebounding slightly by 0.8 percent in 2010. Belka said unemployment, which has so far fallen less rapidly in Europe than in the United States, should be a key worry for governments. Germany, the region’s largest economy but also one of the worst hit by the crisis, has to make sure demand within its borders stays strong to make up for a collapse in exports.

“It’s very important that the measures taken by Germany (and others) are geared towards maintaining a high level of employment,” Belka said. “This keeps the consumer’s confidence up.” Germany’s business confidence hit a five-month high in April, the Munich-based Ifo economic research institute said, fueling hopes of a recovery. But Belka said it was too early to speak of a turning point on the continent.

The warning came before Nordic banking group Nordea posted a 16 percent increase in turnover for first-quarter 2009 and saw operating profit decline year-on-year but topped analyst’s forecasts. Turnover was 2.2 billion Euro for the quarter, while year-onyear operating profit fell 6 per cent to 833 million Euro.The group’s loan losses totaled 356 million Euro in the quarter, compared to 21 million Euro in the corresponding business period 2008.

“Higher loan losses are inevitable when the economy is contracting at an unprecedented speed,” Nordea Chief Executive Christian Clausen said. The losses were mainly attributed to Denmark, but also to other Nordic markets and the Baltic states, Nordea said. The losses were “in line with Nordea’s expectations from the beginning of the year,” but the group said it was uncertain how they would evolve in future. Clausen said that the rights issue of 2.5 billion Euro which was completed in April had helped strengthen the bank’s capital base. Low interest rates during the quarter helped boost household mortgage lending while corporate lending growth slowed. Nordea was created in 2000 but traces its roots to 1997 when Merita Bank of Finland and Nordbanken of Sweden formed MeritaNordbanken. It has some 10 million customers and 1,400 branch offices.