Sunday, June 17, 2012

World Bank chief warns of ‘Lehman’s moment’ for Europe

European national flags flutter near an euro symbol outside the EU Parliament in Brussels  
(REUTERS/Francois Lenoir)
Europe runs the risk of sparking a Lehman-style global crisis with dire consequences for developing nations, outgoing World Bank chief Robert Zoellick said an interview to British newspaper The Observer.

­"Europe may be able to muddle through but the risk is rising," he added: "There could be a Lehman’s moment if things are not properly handled."

In 2008, the fourth-largest US investment bank and financial services firm Lehman Brothers declared bankruptcy after unprecedented losses on the American housing market and devaluation of its assets by credit rating agencies. The insolvency is thought to have played a major role in the unfolding of the global financial panic and subsequent worldwide financial slump.

Now the World Bank head warns of a similar effect for developing nations should the eurozone fail to cope with its current problems.

Zoellick urges emerging countries to "prepare for the uncertainty coming out of the eurozone and the wider financial markets."

"The ripple effects are making everybody's life harder,” he said.

"It will be better if they can avoid piling up short-term debts that can come due in volatile periods and look to the fundamentals of future growth – infrastructure and human capital," the outgoing chief advised.

Zoellick said the World Bank was concentrating on helping developing countries to prepare projects that could go ahead with the right investment and to protect the most vulnerable if there was a second leg to the global financial malaise.

"Given the volatility in the world economy, there is a big emphasis on helping developing countries to develop social safety nets that don't bust the budget," he said.

Countries such as Mexico and Brazil, he added, had shown they could do this using low-cost, effective targeting, information technology and the right incentives.

Robert Zoellick, who plans to retire this month after five years in office, said he will warn the G20 summit of the risks sparking a financial meltdown. The Group of 20 Summit of world leaders is to be held in Mexico on Monday and Tuesday.