Lagarde warns recovery options narrowing

"I believe there is a way to achieve a sustainable recovery, although this path is narrower than before, and is narrowing further still," she wrote in a piece published in daily Handelsblatt today.

Global economic recovery should be driven by shifting economic demand from the states to the private sector, she said, adding that had not yet happened.

Repeating warnings she has made on several occasions in the past month, Lagarde said weak economic growth and weak balance sheets at banks and nation states are causing a crisis of credibility that in turn weakens growth further.

"This vicious circle is gaining momentum and was aggravated by indecision and the malfunctioning of politics."

Risks to financial stability have grown significantly with the ongoing sovereign debt problems, she said, and without decisive action there is a real risk that the large economies "will stumble rather than move forward," Lagarde said.

Reforms are needed to close regulatory gaps in the financial sector. Particularly in regard to cross border solutions, and structures seen as being too important to be allowed to fail.

The fact that these problems remain three years after the collapse of US investment bank Lehman Bros is cause for concern, Lagarde said.