OECD warns of double-dip recession
By CLANCY YEATES | smh.com.au | 16 July
AN OFFICIAL from the Organisation for Economic Co-operation and Development says the world is flirting with a ''double dip'' recession because of market pressure on European governments to slash spending.
Adrian Blundell-Wignall, the OECD's deputy director of financial and enterprise affairs, said yesterday the low capital levels of euro area banks could also stall its recovery.
And while Australia's fortunes are tied more to Asia, Dr Blundell-Wignall said local investors should be aware of the potential effects of such a slowdown.
''There is the chance of a double dip in both the US and in Europe, because the fiscal [support] is dropping out,'' he told an Australia Business Economists lunch in Sydney.
The US had more time than others to get its finances in order, he said, because the greenback was the reserve currency and investors would keep buying US Treasury bonds. In Europe, however, markets are demanding fast cuts to spending, which would dampen the recovery.
''In Europe they have to cut back, and they're very weak, anyway. So if you have to cut back, and you're very weak … I leave you to think what then happens to growth,'' he said.
''That's a major issue, potentially. If there are international spillovers and they affect Asia and our area - that's something that we have to think about.''
He said Europe was especially vulnerable, too, because its banks had much lower levels of high-quality capital on their balance sheets than their US counterparts.
Dr Blundell-Wignall, a former Reserve Bank official, stressed the comments were his own views and not those of the OECD.
The results of recent ''stress tests'' on Europe's banks are to be published next week.
Although these results are unknown, some in the market have already criticised the stress tests because they will reveal less information to investors than similar tests conducted in the US.
Fears of a European default reached a peak in April, when worsening market gyrations forced the European Central Bank to set up a €750 billion ($1 trillion) fund to take troubled assets off bank balance sheets.
In a sign of the problem's scale, European banks hold $US1.9 trillion in government bonds from Spain, Ireland, Greece and Portugal, OECD figures show.
Yields on these bonds have continued to surge in recent months, implying that investors expect loss of up to 30 per cent.
First published by Smh.com.au on July 16 2010
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