World Bank President Zoellick Warns Stimulus ‘Sugar High’ Won’t Stem Unemployment

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Zoellick Warns Stimulus ‘Sugar High’ Won’t Stem Unemployment
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By Timothy R. Homan

May 29 (Bloomberg) -- World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe.

“While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” Zoellick said in an interview with Bloomberg Television’s “Political Capital with Al Hunt” scheduled to air tonight and over the weekend. “When unemployment increases, that’s probably the most political, combustible issue.”

Zoellick’s caution is a contrast with private economists, who are raising their outlooks for growth from India to China as stimulus measures take effect. The biggest developed and emerging nations have committed spending increases and tax cuts totaling 2 percent of their combined economies, a level the International Monetary Fund recommended to end the recession.

The World Bank is monitoring private companies’ abilities to roll over “a lot” of debt in the developing world, Zoellick said. At the same time, he played down risks to the global recovery posed by rising U.S. Treasury yields, saying that “in terms of absolute levels, rates are still pretty low for most players.”

Zoellick also said that the dollar will remain the world’s main currency “for a long time,” and noted that investors flocked to the dollar as a haven during the worst parts of the financial crisis.

Reagan, Bush Terms

Zoellick, 55, took the helm of the World Bank in 2007, and served as U.S. deputy secretary of state and chief trade negotiator in the Bush administration, and in positions at the Treasury Department under President Ronald Reagan. At State, he played a central role in formulating policy toward China, before departing government for a stint at Goldman Sachs Group Inc.

Chinese officials’ comments calling for a new international currency have been “over-read” and may be more of an indication of the nation’s desire to free up its capital flows, Zoellick said. He added that China’s stimulus has helped stoke growth in the nation that “may even beat expectations a little bit.”

China this year approved a $585 billion (4 trillion yuan) stimulus plan, and the U.S. is now implementing a $787 billion package of tax cuts and spending that President Barack Obama signed in February.

“Right now, the international system appears to have a sufficient amount of stimulus,” Zoellick said. “The danger is if you spend too much government money, you create a different problem.”

Yields Climb

Benchmark 10-year U.S. Treasury yields have climbed about 1.25 percentage point so far this year to 3.46 percent, reflecting in part some investors’ concerns at faster inflation and record budget deficits. Rates on 30-year fixed mortgages exceeded 5 percent. Still, Zoellick noted that in the past day there’s been “unwinding” of some of investors’ concerns.

“In terms of financial markets, I think people have broken the fall,” Zoellick said. What’s needed now is to “focus on how to recapitalize banks and deal with the bad assets -- that’s a story that’s still going forward.”

In the U.S., Treasury Secretary Timothy Geithner aims to use money from the $700 billion financial-rescue fund to help kick-start a $1 trillion effort to remove devalued loans and securities from banks’ balance sheets. The first transactions for mortgage securities aren’t expected to start for months.

Eastern Europe is one region in particular danger of a further economic decline, the World Bank president said today.

Eastern Europe

“The nature of integration over the past 20 years has been unwound somewhat,” Zoellick said. He warned about “the danger of unemployment leading to protectionism as politicians sort of feel they run out of different levers.”

Eastern European nations have received more than $90 billion in international aid since September to prevent the countries shaken by the financial crisis from defaulting. Nations that have received bailouts include Romania, Hungary, Belarus, Serbia, Latvia and Ukraine.

Credit ratings companies have downgraded the outlooks for banks in the Czech Republic, Ukraine and Kazakhstan.

Foreign lenders in Romania and Hungary pledged this month to keep doing business there to help the economies weather the economic turbulence. Romanian banks, about 90 percent foreign- owned, agreed to boost their capital by a total of 1 billion euros ($1.4 billion) by March 2010 as overdue debt rises, the International Monetary Fund said on May 22.

Protectionist Threat

Another threat is trade protectionism, which nations may resort to in order to protect their industries from the global slump, Zoellick said.

“The real danger is that you get into a cycle of retaliation,” he said. He estimated that 17 of the Group of 20 emerging and developing nations are considering or imposing restrictions on trade, breaking a pledge they made during an April 2 summit in London.

The World Trade Organization in March predicted a 9 percent drop in global commerce this year.

China and Brazil are researching how they can conduct trade in the yuan and real, in a signal they’re seeking to reduce their reliance on the dollar.

“You could -- and you’ve already seen this over the past 20 years -- have multiple currencies” used in the global system, Zoellick said. “You will see China and India playing a larger role, including in financial markets.”

Still, he added that “I just don’t believe it’s going to supplant the U.S. as a reserve currency.”

To contact the reporter on this story: Timothy R. Homan in Washington at Thoman1@bloomberg.net
Last Updated: May 29, 2009 16:50 EDT

 

The only part that I found interesting was when he said that food prices in the developing world haven't come down as much as they did in the developed world.

Looks like the World Bank is doing its job!