The IMF has warned that unless the eurozone resolves its capital crisis, European banks’ balance sheets will contract severely, further damaging growth and pushing unemployment beyond its already record highs in the region.

In its global financial stability report, the IMF concluded that capital flight from the eurozone’s periphery to the bloc’s core, driven by fears of a break-up of the currency union, had sparked “extreme fragmentation” of the euro area’s funding markets. The IMF said this was causing renewed pressure for banks to shrink their balance sheets, particularly those in countries with fiscal woes.

Delays in resolving the crisis meant that unless eurozone officials beefed up their policy response, European banks would dump $2.8tn worth of assets – more than 7 per cent of their balance sheets – by the end of next year. Banks in the periphery would shed just short of 10 per cent of their assets.