ECONOMY

World Bank’s Zoellick warns Europeans to prepare for Greek contagion

European leaders must be ready to recapitalize banks in the event of a Greek exit from the euro zone currency bloc and assure funding for Spain to prevent an economic collapse, World Bank President Robert Zoellick said on Friday.

Greek elections scheduled for this month could hasten the country’s departure from the euro zone, should parties that wish to scrap the country’s bailout program prevail.

If Greece withdraws from the euro and European leaders do not act decisively to prop up banks, Zoellick wrote in a column in the Financial Times, the resulting crisis could push the continent into a «danger zone.”

“Eurozone leaders need to be prepared – psychologically and through the European Stability Mechanism (ESM) – to recapitalize banks,» Zoellick wrote. «In the eurozone, the guarantees of some national sovereigns are unlikely to be sufficient and only that of the ‘euro-sovereign’ will suffice.”

Zoellick, whose five-year term at the head of the World Bank ends on June 30, added: «It is far from clear that eurozone leaders have steeled themselves for this step.”

On Thursday, the European Commission said there is no possibility for euro zone banks to be directly recapitalized using the ESM, although that statement appeared to contradict a document released on Wednesday from the commission.

But simply providing liquidity to banks is not enough, Zoellick wrote.

Leaders must also ensure that banks in turn lend that money out to prevent the corporate sector from seizing up as they did after collapse of US investment bank Lehman Brothers in 2008.

“And if banks get emergency assistance, bank executives will need to be pressed to keep providing customers with cash,» Zoellick said.

In the medium term, euro zone leaders should agree on funding assurance for countries such as Spain, either through the ESM or euro zone bonds, Zoellick said. Such a move, he argued, would be in line with calls from Germany for troubled states to reduce their deficits.

The head of the International Monetary Fund Christine Lagarde denied a news report on Thursday that the IMF was preparing assistance to Spain, saying the fund had received no requests for financial support from the country.

Spain’s troubles mounted this week, after it revealed that its highly indebted regions faced 36 billion euros of debt refinancing bills this year, far more than the previously stated 8 billion.

Spaniards, worried by the state of their banks, moved record amounts of money abroad, official figures showed.

[Reuters]