JOHANNESBURG — Europe and the United States have failed to strengthen the institutions responsible for the global economic crisis, the IMF indicated Tuesday in a report suggesting the U.S. privatize mortgage giants Freddie Mac and Fannie Mae.

In the euro-zone, the International Monetary Fund pointed to "weak balance sheets" of governments and banks and said the European bailout fund needs to be increased from its headline 440 billion euros.

European banks will need continued financial support and require rigorous "stress-testing," it said. Those that cannot stand the strain should be closed, it recommended.

Global financial instability will continue for another two years, the International Monetary Fund warned, with an uneven pace of recovery between sluggish advanced economies and buoyant developing ones.

"While progress has been made and most financial sectors are on the mend, risks to global financial stability remain," the report said.

Chief IMF economist Olivier Blanchard said Tuesday the "still weak labor and housing markets" in the United States have contributed to a fiscal deficit more than double that in the euro area, and could impact the global economy.

"The absence of a credible, medium-term fiscal strategy would eventually drive up U.S. interest rates, which could prove disruptive for global financial markets and for the world economy," the report said.

It suggested a speedy action plan, possibly including the privatization of mortgage giants Freddie Mac and Fannie Mae, which some accuse of fueling the U.S. housing crisis. Freddie Mac and Fannie Mae are responsible for about half of all mortgages in the United States.

They "could be either privatized or converted to public utilities with an explicit (and explicitly funded) guarantee," the IMF said.

Nevertheless, the IMF gave the United States the largest projected increase compared with its October report, raising anticipated economic growth in 2011 from 2.3 percent to 3 percent. Still, Blanchard warned the predicted growth "is not going to be able to make a big dent," in high unemployment rates.

U.S. unemployment will hover at 9 percent by the end of 2011 and 8 percent by the end of 2012, Blanchard predicted. The unemployment rate was 5 percent three years ago.

Globally, the IMF raised its projections for overall economic output to an increase of 4.4 percent in 2011, slightly higher than the 4.2 percent anticipated in the Washington-based institution's October report, but slower than the 5.0 percent achieved in 2010.

The IMF made no change in its forecasts for the rest of the world, with Asian giants leading the way: China at 9.6 percent and India at 8.4 percent growth. Also unchanged was the forecast for Japan and the 17-country eurozone, at 1.5 percent.

According to the IMF, the economies of advanced countries will expand by 2.5 percent in the next two years while emerging and developing countries are expected to continue a strong rebound and grow by 6.5 percent in the same period.

Advanced economies are increasingly sensitive to accumulated debt, it says, while policy makers in emerging markets like Brazil and China are grappling with how best to absorb the cash from rising commodity prices and investors without overheating their economies.

Progress in advanced economies will be slow coming, Blanchard said. They are "in a fiscal hole, large debt, large deficit and these have to be slowly eliminated and that's going to take a long time."

Sub-Saharan Africa is expected to show the strongest regional progress, at 5.8 percent.

Blanchard said capital flows to emerging market countries were "both a blessing and potentially a curse," providing cheap imports but the danger of overheating economies with an influx of cheap money from advanced countries with low interest rates .

China can help ease imbalances by raising the value of its currency, Blanchard said. The U.S. and other countries charge that China keeps its currency artificially low to maintain an export advantage.

"China is moving in the right direction and focusing increasingly on domestic demand, but we think it can be done faster," he said.

Associated Press writer Michelle Faul contributed to this report from Johannesburg.