OECD tells Eurozone to prepare its banks for a tsunami coming from developing countries

19 November 2013, Left/Right: Pier Carlo Padoan, Deputy Secretary-General and Chief Economist of the OECD, Angel Gurría, Secretary-General, OECD. (© Herve Cortinat/OECD).

OECD is not like the IMF. The Organisation of Economic Co-operation and Development, unlike the International Monetary Fund doesn’t chew its words, when it comes to the economic prospects of the global economy. The reason is that its mandate obliges the Organisation to effectively protect its 34 member states from the dangers lurking ahead, by pointing out risks and remedies. On the contrary, the International Monetary Fund cares more to protect the assets and shares of the major western banks.

That’s why OECD’s latest Economic Outlook report on world economy warns plainly that in the current conjuncture, “the global environment may now act as an amplifier and a transmission mechanism for negative shocks from emerging market economies (EMEs). The European Sting noted on 9 October 2013 that “IMF economists, Kalpana Kochhar and Roberto Perrelli, in their study entitled “How Emerging Markets Can Get Their Groove Back”, posted yesterday by iMFdirect, give a rather frightening response to this question. They conclude that “we estimate that emerging market’s “potential” growth needs to be revised down”.

It’s more than evident that where the IMF sees, alarmingly enough, a need to revise down the growth prospects of the EMEs, OECD raises the stakes expecting “negative shocks from emerging market economies”. This newspaper estimated in early October, that a possible reversal of the super relaxed monetary policy followed many years now by the American central bank, the Fed, may cause a crisis in many developing countries like Turkey and Brazil. Now, the Organisation says that under the current conditions, potential shocks in the developing economies will be amplified while transmitted to the rest of the world.

Keep printing money

As the OECD Secretary-General Angel Gurría put it yesterday in Paris, while presenting the Outlook, “tapering of asset purchases by the US Federal Reserve (Fed) could bring a renewed bout of instability”. In short, what Gurría said is tantamount of the Fed being obliged to keep printing almost $85 billion dollars a month and with it continue buying government and bank bonds. This Fed’s ‘asset’ buying programme cannot go on incessantly though. It has to be reduced and gradually stopped.

The problem is, however, that growth in many developing countries is based on cheap dollar loans, from the big western banks. Those abundant and cheap dollar loans are invariably financing governments, lenders and the business sector in emerging economies. If the American dollar source dries up, many developing countries would not only recede, but they will face grave problems of repaying their debts. Naturally, the negative impact on the developed countries will be strong, at least as strong as the positive spillover was in the fast growth period.

Tsunami alert

In reality what is lying ahead will be a similar sequence as in the past, but with the exactly opposite content. As the Outlook stresses, what is coming will be “contrary to the situation in the early phases of the recovery when stimulus in EMEs had positive spillovers on growth in advanced economies”. Plainly, the OECD tells its advanced member states to prepare for the tsunami.

Of course, the negative impact will be much stronger to the export oriented, developed economies of Eurozone. The US will be less hurt, because its economy is not based on net export. On the contrary, the country suffers of chronic trade deficits, which in this case may be an advantage. This said, the Organisation notes that “global GDP growth (prediction) is revised down by just under ½ percentage point both this year and in 2014 to 2.7% and 3.6% respectively. Almost all of this reflects a further growth slowdown in the large emerging market economies (EMEs), which is tempering the pace of the recovery in the OECD (developed) economies”.

Can Eurozone resist?

Naturally the problems will be greater for Eurozone with its grave deficiencies in the banking sector. According to Eurostat, the statistical service of the European Union, in 2012, government interventions in the context of the financial crisis, increased the fiscal deficit in the EU 27 by €53.4 billion, or 0.4% of GDP. In some Eurozone countries (Greece, Ireland, Belgium, Netherlands) almost the entire banking sector had to be restructured. Of course this process is far from been concluded. According to Joaquín Almunia, Vice President of the European Commission “23 banks had to be resolved in Eurozone so far and still 27 restructuring cases are now open, in particular in the euro-area countries under programmes”.

This is a very delicate situation. If Eurozone banks prove to be overly exposed to the EMEs, what OECD says about the forthcoming shocks there, has a dreadful connotation. This eventuality explains the haste the European Central Bank shows in testing the ground of Eurozone’s banking sector. In short, OECD is indirectly addressing an urgent call to Eurozone, to prepare itself against an eventual tsunami coming from the EMEs.

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