In a bid to protect the global economy from further financial oblivion, the International Monetary Fund pressed Europe's many banks to raise capital to cushion the $405 billion it stands to lose because of the massive euro-debt crisis.

"Time is running out to address existing vulnerabilities," the IMF said in its Global Financial Stability Report.

Fiscal strains from weaker euro-zone members created an impact of about 200bn euros on banks in the European Union since the start of last year. Government debt and lower bank asset prices furthered credit risks between banks hitting to 300bn euros.

The IMF is worried banks might raise interest rates on their loans and control credit in response to capital deficit. The fund reminded such a move will only further harm the weaker economies.

In the report, the IMF said banks must raise capital and that governments may need to inject capital into their banks in some cases.

Governments are now struggling to fix their finances right, while larger European nations discuss how to rescue their neighbours from further downfall.

The IMF said the global credit crisis "has moved into a new, more political phase"

The US debt-rating downgrade, banks' capital scarcities and the turmoil in the euro zone all contribute to the continuing global financial instability.

The IMF said there is a need to ratify a settlement that will expand Europe's rescue fund towards neighbours who are under financial pressure.

"The set of policy choices that are both economically viable and politically feasible is shrinking as the crisis shifts into a new, more political phase," the fund said.