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).

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.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Greenpeace’s saints and sinners in the tech world

Towards a European Republic

There is no recipe for a healthy mental state

EU guidance on the handling of visa applications from residents of Ukraine’s Donetsk and Luhansk regions

EU Parliament shows its teeth in view of 2014 elections

There are now four competing visions of the internet. How should they be governed?

The brain amidst COVID-19 pandemic

The UN came of age with the nuclear bomb. Time for it to step up to the AI era

The Chinese spirit

These are the world’s healthiest nations

Youth for Climate Change

George Floyd: these are the injustices that led to the protests in the United States

Can the US-Iran rapprochement change the world?

Brussels to tear down the trade wall with Mexico as opposed to Trump’s “walls”

The ECB tells Berlin that a Germanic Eurozone is unacceptable and doesn’t work

This South Korean company has built a 5G search and rescue airship

Welcome to the age of the platform nation

Spain will soon overtake Japan in life expectancy rankings. Here’s why

Hatred ‘a threat to everyone’, urges Guterres calling for global effort to end xenophobia and ‘loathsome rhetoric’

Why Trump’s tariffs are good news for US garlic farmers

The Juncker Plan at work: bringing investment back on track in Europe

UN Climate Action Summit concludes with insufficient EU and global pledges

Three of the world’s hardest-hit nations are preparing to end their lockdowns

Indonesia: Psychological impact on earthquake survivors turns villages into ‘ghost towns’

‘A trusted voice’ for social justice: Guterres celebrates 100 years of the International Labour Organization

Restrictions, unmet promises, unbridled violence in Sudan, a ‘recipe for disaster’, says Bachelet

COVID-19 is a threat to waste pickers. Here’s how to help them

World’s 1.8 billion youth must ‘have a say in the future of the planet’

Human trafficking cases hit a 13-year record high, new UN report shows

5 facts about the world’s most valuable company, Saudi Aramco

Transport Committee approves major reform of road transport sector

How Costa Rica’s environment minister talks to his daughter about climate change

How to build a paradise for women. A lesson from Iceland

Commission publishes the first report on the issuance of a Eurobond

Antitrust: Commission opens investigation into possible anti-competitive conduct of Amazon

Innovations for Content Professionals at the DCX exhibition 2018 in Berlin, in association with The European Sting

WHO and IFMSA as transcendent pillars for world improvement

At last Germany to negotiate the costs for a really cohesive Eurozone

Building social good – lessons from an Asian giant

EU budget for 2019: do more for the young, SMEs and the climate, urge MEPs

GSMA Announces Latest Event Updates for 2018 “Mobile World Congress Americas, in Partnership with CTIA”

UN court increases sentence of former Bosnian-Serb leader to life imprisonment

Impact Investment needs global standards and better measurement

Britain’s May won the first round on the Brexit agreement with the EU

Is Universal Health Coverage really available for all in the European Union?

Does the West play the Syrian game in Egypt?

The blackened white coat of the doctors

The Sahel is engulfed by violence. Climate change, food insecurity and extremists are largely to blame

Efforts to save the planet must start with the Antarctic

Reading this alone? Recent surveys reveal the curious truth about loneliness

Far more needed to ‘confront the world’s climate emergency’, UN chief tells ASEAN Summit

ECB settles the bank resolution issue, makes banking union tangible

Our food system is pushing nature to the brink. Here’s what we need to do

Brexit deal approved by the European Parliament

Rule of Law: European Commission takes new step to protect judges in Poland against political control

These are the OECD’s most productive economies

West Africa ‘shaken by unprecedented violence’, UN envoy tells Security Council

Now doctors can manipulate genetics to modify babies, is it ethical?

UN receives ‘Humanium’ wristwatch gift, symbolizing peaceful transformation

How nudge theory can help empty our plastic-filled ‘drawers of shame’

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s