ECB LTROs to ‘Rock’ World From 2014, World Bank Basu Says

Three-year loans granted by the European Central Bank last year will disrupt the global economy when the debt matures in 2014 and 2015, according to World Bank Chief Economist Kaushik Basu.

“It’s a debt wall that’s going to come up to us,” Basu said at a seminar in Helsinki today. “We’re going to get another big rocking of the global economy in 2014, 2015.”

The ECB’s injection of more than 1 trillion euros ($1.3 trillion) of three-year liquidity into Europe’s banks in December and February was intended to be a game changer that would jump start lending in the region. Instead, the crisis grew deeper, drawing a subsequent pledge from ECB President Mario Draghi to do “whatever it takes” to backstop the 17-nation currency zone. The ECB’s lifeline only “bought time,” Basu said. “It doesn’t solve any of the fault lines.”

Given the circumstances, “I don’t think the ECB had any other choice,” he said. “But when you bought time, you have to do things with the time you bought, otherwise the crisis will come back. And there’s a danger of that.”

As the debt turmoil in Europe persists, the risk that the global economy will suffer is growing, Basu said.

“The downside risk for the world economy remains very high,” he said. “The European situation will be very hard for 2 to 2 1/2 years. A slowdown is going to affect the situation in emerging economies.”

Commodities Effect

The best-case scenario would be for European growth to stagnate until 2015 before picking up, Basu said. The comments don’t indicate that the World Bank is likely to cut its latest forecast, he said.

The Washington-based lender projects 2.5 percent economic growth for the global economy for this year. Next year, gross domestic product will increase 3 percent, according to a June forecast. That compares with 2.7 percent growth last year and 4.1 percent in 2010. The World Bank estimates the euro area will contract 0.3 percent this year.

“The world is now beginning to see a kind of inflation and stagnation experience, which is very unusual,” Basu said. “What is happening increasingly is growth is reasonably well coupled, the industrialized countries and poor countries are moving together, but inflation is tending to be decoupled.”

Food-Price Inflation

A large part of the ECB’s three-year loans have gone to sovereign bonds in an arbitrage trade, he said. Liquidity has also spurred food-price inflation in the emerging world since 2010 as investment banks purchased commodities, Basu said.

Wheat prices have jumped 30 percent this year, while corn has added 16 percent and soybeans 19 percent. As growth slows, crude oil has declined 11 percent.

“You have to put together the structural reforms that Europe is trying to put together very quickly, so that by the time the repayment takes place it’s a stronger Europe that you have,” Basu said. “And that’s all the fiscal policy, banking policy which has been talked about -- you want action on those.”

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