Downside risks have risen sharply. In the near term, the main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk. This could lead to additional increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in relative exchange rates. Given trade and financial linkages, the ultimate effect could be substantially lower global demand.

In a separate report from late June, released today, the IMF said it does not expect the U.S. economy to fall into a double-dip recession, but that unemployment will stay above 9 percent throughout 2011. That translates into a long, slow recovery characterized by persistent joblessness and sluggish growth in GDP and consumer spending: “The outlook has improved in tandem with the recovery, but remaining household and financial balance sheet weaknesses — along with elevated unemployment — are likely to continue to restrain private spending.”

But the biggest risk to the U.S. recovery? Housing:

[The] backlog of foreclosures and high levels of negative equity, combined with elevated unemployment, pose risks of a double dip in housing; the continued deterioration in commercial real estate poses risks for smaller banks; and financing conditions remain tight, especially for smaller firms reliant on bank finance.

From Nouriel Roubini, famous for having predicted this whole mess:

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster.

Paul Krugman was equally blunt:

Why do we need international cooperation? Because we have a globalized financial system in which a crisis that began with a bubble in Florida condos and California McMansions has caused monetary catastrophe in Iceland. We’re all in this together, and need a shared solution.

Why this weekend? Because there happen to be two big meetings taking place in Washington: a meeting of top financial officials from the major advanced nations on Friday, then the annual International Monetary Fund/World Bank meeting Saturday and Sunday. If these meetings end without at least an agreement in principle on a global rescue plan — if everyone goes home with nothing more than vague assertions that they intend to stay on top of the situation — a golden opportunity will have been missed, and the downward spiral could easily get even worse.

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.

Here’s British Prime Minister Gordon Brown on the British plan, which calls for injecting money directly into banks.

Don’t look just to Wall Street for developments in this crisis. Watch to see if the Treasury Dept. and the U.S. government take some aggressive steps in the next few days — including coordinating a global response.

If they don’t, yes, it is time to panic.