MR. FERGUSON: Hi, good morning. Alex Ferguson from the World Bank. Thanks for joining us today. World Bank President Robert Zoellick is going to brief you on this week's G20 meetings.
Just for background, you should all have been sent his Washington Post piece that was published on Sunday.
After his statement, Mr. Zoellick will take a few questions. When we do get to the questions, please identify yourself and your organization before asking a question. All of Mr. Zoellick's remarks will be on the record.
Mr. Zoellick, please, go ahead.
MR. ZOELLICK: Okay. Thank you, Alex.
Well, thanks, all, for joining us. We're looking towards the G20 Summit this weekend, and the package developed by the Eurozone leaders last week was a positive step, but there's much still to do. What's most important now is not to waste the moment.
Markets are responding now to readings of confidence as much as pure finance, and the confidence challenge is now focused on governments and institutions, not only in the European Union. Market confidence remains very fragile, and we saw it evaporate in August after the EU agreement in July.
The global economy is still very much at risk from faltering economies in developing countries, and the Eurozone deal has bought some time, and the challenge is how to use the time.
I believe it would be very useful if the G20 leaders can send a strong signal on follow-through after the Eurozone announcement so as to sustain and build confidence, and I urge G20 leaders not to permit these primary messages to fray into tactical political positioning on secondary issues.
The world economy is still wobbling on the edge right now, and it could tip very quickly if momentum isn't maintained and built upon.
The one ray of economic light in this downturn has been emerging markets. Developing countries have accounted for two-thirds of global growth over the past five years. But as we saw in August and September, they also can be hit when developed countries trip up. We saw equity markets drop over 20 percent, bond spreads increase, currencies were tumbling, started to affect trade, and the real risk was if the slowdown in confidence in the European Union and United States spread to developing countries, consumer and business confidence and then would affect domestic demand.
Now, this has been stemmed somewhat with the Eurozone deal, but people will be looking to this G20 meeting.
The World Bank will be seeking to highlight three points: Some fallout from the Eurozone that we need to address; second, a broader growth and jobs agenda; and third, how we can try to stretch resources to assist.
So, first, we have to anticipate and help counter some of the second-order effects of the Eurozone arrangement. In particular, European banks are already selling assets and they'll be shrinking lending. Trade finance is a short-term type of loan and it can be run down quickly, but trade finance operations are also labor and operationally intensive. They're not easy to develop substitutes for, and we're already seeing some signs of a shrinking trade finance in West Africa and elsewhere.
Now, in 2008 and 2009, the World Bank Group's private sector arm, IFC, launched special trade finance facilities, and we're already activating those to provide support; though, in the area of liquidity, we leveraged it through private sector partnerships, and some of those institutions may be less able to provide liquidity themselves this time.
In addition, southeastern Europe, the Balkans, Eastern Europe are at particular risk of credit crunch in the European Union banks, and I've been working already with Thomas Mirow of the EBRD on trying to replicate the Vienna Initiative that we offered last time to make sure that there was credit support for those countries.
The Middle East and North African countries rely heavily on exports to the European Union. So, the slowdown in the EU comes at a very sensitive time given political developments. We can help here, too, but we'll need good cooperation with the European Union.
And there will be a greater temptation for protectionism in various guises from all countries. The best defense is a market-opening offense, but unfortunately trade liberalization has been stalled.
Second, developed and developing countries alike need to keep their eye on the fundamentals of future growth in jobs. Macroeconomic space for all countries is limited and so, what I'm referring to are structural reforms of tax policy, entitlements, labor, competition, investment, innovation, infrastructure.
In developing countries, the growth agenda shows the interconnection with food security, infrastructure, inclusive policies. These are not peripheral issues and especially in a fragile and crisis-prone world where--needs of human safety nets as well as financial safety nets.
In the area of food security, this involves both increasing production and productivity as well as dealing with price volatility.
Now, we've released a Food Price Watch today which shows that the index is up 19 percent over a year ago, even though it dropped somewhat in September, and it had revealed that we're in a period of continued serious volatility, which is especially high in low-income countries.
Now, you may recall that in June IFC, our private sector arm, launched a new agricultural price risk facility to help producers and consumers in developing countries cope with volatility. We had the first facility with JP Morgan to assist countries in Latin America, and today we're bringing to our Board a $100 million facility with SocGen of France to help producers and buyers in the Middle East and Sub-Saharan Africa. And with that amount of
financing, we should be able to leverage hedges many times that amount. So, pending Board action, there should be a separate release later today.
We also, at the G20, have been discussing the push for infrastructure development, cutting costs of remittances and linking them to savings in credit vehicles, developing local currency bond markets, and we're going to keep pushing for the spread of effective focused social safety nets for all countries. The poorest and most vulnerable are in particular need of a cushion in times like these.
Last week, I was in the Philippines where I saw one of the more recent of the over 40 Conditional Cash Transfer programs that the World Bank has helped support around the world, building on the initial programs in Mexico and Brazil, and these are impressive because they often deal with 10 to 15 percent of the population at the bottom for about a half of one percent of GDP.
And third, we'll be talking about how we can try to stretch resources. The World Bank has worked with the regional evaluation banks to assess what we could provide over fiscal years '12 and '13. We're almost halfway through Fiscal Year '12 because that starts on July 1. So, this is over a two-year period.
We've estimated with the regional development banks we could provide somewhat over $200 billion in financing, drawing on a full set of tools. This includes the ultra-concessionary financing such as IDA, our regular borrowing, private sector, the World Bank Group amount of that is about 115 billion of the over 200 billion.
And we also discussed with the G20 that, if we could get some more flexibility with maturity and pricing of loans, I believe we can even provide more support if needed.
So, at Cannes, the countries need to follow through on the Eurozone plan, they need to have attention to growth and job strategies, and they need to recognize that developing countries are now a key source of solutions to the world and then opportunity with the right investments and policies. We need to make the world safer for people, not just systems.
Pleased to take your questions.
MR. FERGUSON: Thanks. And we'll take your questions. As I said earlier, can you please identify yourself and your organization before asking your question. Can we now have the first question.
OPERATOR: If you'd like to ask a question from the phone, press star one, please unmute your phone and record your name. To withdraw your question, press star two. Once again, it's star one to ask a question, and you do need to record your name. Please standby for the first question.
MR. FERGUSON: Can we have the first question, please.
OPERATOR: The first question is from Sudeep Reddy from The Wall Street Journal.
QUESTION: Hi, Mr. Zoellick. How would you assess the latest European debt plan from a growth perspective, in particular what should some of the European countries that are under severe fiscal constraints such as Greece and Italy be doing to boost growth?
And secondly, what do you think about how Europe is going about raising money for the Fund, particularly how they continue to pursue emerging market governments to provide money?
MR. ZOELLICK: Well, on the first part, I think the Eurozone plan is really primarily focused on short-term liquidity stabilization. So, I actually distinguish it from a structural growth plan.
What that plan is designed to try to do is strengthen the banking system, give Greece a chance to recovery by cutting the debt, and multiply the resources of the EFSF so as to help make sure that Spain and Italy can roll over debt while also dealing with Ireland and Portugal and Greece. And so, that, to me, is sort of a classic example of buying time while one still has to work on the overall fundamentals.
And that's one reason why--so, my core point is I know how difficult this was to reach. I think they made some very important steps, but my read of the situation is that we're now dealing principally with assessments of market confidence, and market confidence is going to be based on assessments of whether the governments and the institutions follow through. So, to me, the key point is how they're using the time and being able to respond with the overall follow-through of activities.
So, I understood this morning that, in the case of Italy, there's going to be a budget process over the course of November to try to package the overall proposal in an up-or-down vote, and that will obviously be watched very closely in terms of trying to see whether Italy can take the appropriate follow-up actions.
The types of things that I've been referring to on the growth side have been discussed in national parliaments, but they haven't been so much at the heart of the Eurozone's rescue package, and those go to some of the issues that I mentioned about tax and investment policy and creating a competitive environment, a lot of the things that Germany had done quite successfully over the past years.
As for your second question about outreach to others, at least as I've been able to ascertain it, the picture is pretty clear: Europeans are going to have to be the principal agents in solving Europe's problems. Others will be willing to try to be of support. They are going to be principally doing it through the international institutional mechanisms such as the IMF.
I think as for the particular use of the EFSF that there are two vehicles that they have discussed: One is a form of an insurance model which is trying to multiply with a, for example, first-loss provision.
The second element which would allow others to invest, I think, needs further clarification to have a sense of what risk people would be taking in terms of investing in it. And frankly, Sudeep, from what I've seen is I think some--at least, I'm not referring particularly to your paper, but I think some of the earlier reporting got a little bit ahead of itself in assuming that some of the developing countries would rush in, because I didn't think they would and so far I don't think they have.
MR. FERGUSON: Thank you. Can we have the next question, please?
OPERATOR: The next question is from Alan Beattie from the Financial Times.
QUESTION: Hi, good morning, Mr. Zoellick. You were mentioning the possible impact of the Eurozone crisis on the rest of the world and specifically the developing world. How much independent growth momentum do you think the emerging markets have, I mean, particularly given that, for lots of talk about rebalancing, there still seems to be a lot of dependence in the emerging market world on exports to the U.S. and to Europe?
MR. ZOELLICK: Well, I think the interconnections are strong. I think prior to August we did see a multispeed recovery where the emerging markets had recovered quite well, had come back beyond the initial point of the crisis and, if anything, the risk was of overheating. I think the events in August in the Eurozone and, to a degree, the U.S., showed that the effects on financial markets flowed quite quickly to the developing world. So, as I mentioned, equity markets came down to over 20 percent. There has been some recovery with the deal. Bond spreads had gone up about 100 to 180 basis points. They've come back down, again, with the deal.
You've seen what's happened in some currency markets.
And as I suggested, we already started to see the effect of the slowdown in the trade area. So, and the next category that we were most watchful of was the one that I referred to of, if the confidence that has affected consumers and businesses in the developed world also infected the developing world--and there, it was a little hard to tell. You could see through some of the PMIs that they were starting to show some deterioration, I think, with the Eurozone deal, you've seen some pop-back but, frankly, high degrees of uncertainty.
And so, it's the core message that I think coming out of this G20 meeting, people are going to look through to see the follow-through on the principle areas that the Eurozone has outlined, but they're also going to look to see whether there's a tension to the ongoing growth agenda that I mentioned.
MR. FERGUSON: Thanks. Can we have the next question, please.
OPERATOR: The next question is from Howard Schneider from The Washington Post.
QUESTION: Hi, Bob, and thanks for doing this. My question is a little--I want to just sort of step back on the last couple of days, here, you know, the whole ethic of the G20, the whole idea was, you know, coordinated policy across the major economies, and yet you see this intervention by the Bank of Japan now just a couple days before the Summit, you know, without really discussing or coordinating it. And now, you see this call for a referendum in Greece really catching all of the European leaders off guard, a clear example, it seems to me, that they in a sense really don't have control of their own agenda.
So, [technical difficulties] two years ago in London, is this group really living up to [technical difficulties].
MR. FERGUSON: Sorry, we lost you the last bit. Can you repeat the last--
QUESTION: I'm saying, just, I mean, isn't it pretty clear that this Group is not living up to its potential--that this forum is not living up to its potential as a place to coordinate these important policy decisions?
MR. ZOELLICK: I think we have to see what comes out of this weekend's meeting.
I think that the Eurozone arrangement--I know, because I was with the Finance Ministers a week before--was not easily achieved. And I think, as I mentioned, it's an important step, but it's only a step.
In the case of Japan, obviously, part of the G20 but not part of the Eurozone discussions, Japan has been intervening modestly over this time period.
My own view is that, particularly for the G7, that interventions in a flexible exchange rate system would be better off being coordinated. So, I think that if they haven't been--and I just don't know for sure with all the Finance Ministers, but from the reporting I haven't seen evidence of it--that would be disappointing.
In terms of the Greece referendum, that's less of a G20 issue and more of a EU issue and to me it looks like a roll of a dice, and you know, I just--I don't know how the question will be phrased. We don't have the exact timing of the referendum. For certain, it's going to add uncertainty to markets at a time when, I think, people had hoped that the Eurozone deal and the actions to be taken would help to alleviate some of that uncertainty.
So, this is an evidence of some of the fundamental problems that have been plaguing Greece throughout the whole process. And so, in that sense, it certainly makes the hill steeper for the G20.
MR. FERGUSON: Thank you. Can we have the next question, please.
OPERATOR: The next question is from Alessandro Merli from Il Sole.
QUESTION: Yes, good morning. I wonder if you can tell us what do you think is missing from the European plan. You talked about rebuilding confidence and stabilizing the situation. This seems to have lasted a little more than 24 hours. Do you think anything in particular was missing there as a tool of reestablish [unclear]--
MR. ZOELLICK: I think it's more a question of the follow-through, and most of the commentators focus on three elements. I focus on five, in part, from some of my discussions with some of the Europeans who have been part of it.
First, you have the bank recapitalization. That is, I think, an important step. I think you had an initial positive reaction in terms of some of the bank equities, but it has to be accomplished, as I recall, by about the middle of 2012. So, the devil will be in the details of the execution.
Second, you have the multiplication of the EFSF's facilities, and that one was somewhat vaguer about how it was going to be accomplished and, as I mentioned, the idea of using some of the EFSF funds for first loss insurance provision is a viable alternative.
The other method, frankly, I think, required clarification, and my sense of it was that the leaders, understandably, wanted to try to take those models and further define them with markets, including potential investors, to see how they could get the greatest effect.
Third is the actions that Italy and Spain take themselves. You know, these countries should be able to make it if they continue to take the right actions at home. And so, in that sense, it's linked to the EFSF's ability to help them roll over their debt, but in a world where markets are--depending on confidence--it's going to depend a lot on the governmental actions.
And Spain actually has taken a series of significant actions. I think that distinguished itself somewhat from Italy. We'll have to see whether this most recent proposal that I mentioned about a package of reforms during the month of November can be pursued and, if so, whether that can help boost confidence.
Fourth, you have the Greek debt, and there will be debates about whether the reduction is deep enough, but it certainly gave Greece a much better chance, and now we have the uncertainty related to the decision the Greeks will have to make in their own referendum.
And the fifth element is one that I think is important to connect the immediate to the medium and long term, and that is what some in Germany have discussed as political and fiscal union or, sometimes, in France, is talked about as economic governance, and that is recognizing that these steps fundamentally buy time. What will be the future structure of the European system of fiscal support that complements the monetary union.
So, the monetary union as constructed without the fiscal discipline clearly ran into trouble, and markets are well aware of that. So, the question will be what type of political and fiscal union will be built on the Eurozone on top of it. That's not going to be done overnight, but I think people will be looking to see what are the directions and steps that are taken.
So, again, I'm not critical of the package. What I'm saying is that the devil will now be in the details of the follow-up, and this is why the G20 leaders shouldn't waste the moment.
MR. FERGUSON: Thank you. Can we have the next question, please.
OPERATOR: The next question is from Phil Thornton from Emerging Markets.
QUESTION: Thank you very much, Mr. Zoellick. Can I just pick up the theme about the role that emerging markets and developing countries can play. You've highlighted their strong level of growth, but a lot of the recommendations you're talking about seem to be quite long-term.
Isn't the G20 an excellent opportunity for the emerging markets to really step up to the plate and take the sort of immediate action that was taken by the G20 in London?
MR. ZOELLICK: Well, I don't know what actions in particular you have in mind, and remember, what--at least, the way I see things is markets are now looking for a sustained boost of confidence, and I've outlined how the Eurozone could take first steps, but I think there need to be follow-up steps and others need to be taking steps in support of that.
So, as I said, I think that if the G20 leaders have the primary message of supporting these steps that the Eurozone has taken plus the pro-growth steps that I referred to in avoiding sort of fraying at the edges with sort of domestic political positioning, that would send a positive signal to markets, and developing countries will be part of that.
At the same time, I think the best thing the developing countries can do is to continue to have the pro-growth strategies that they have. They've been the bright light in the picture, and so, they do have a common interest in Europe and the United States and Japan enjoying full recovery.
But I don't want to--I don’t think one should raise expectations about what one could expect them to be able to do to help Europe and the United States solve their own problems.
And in fact, I think that one of the misleading paths is to assume for any of these countries that somebody else is going to bail you out and solve your own problems. Europe's got to solve its problems, United States has got to solve its problems, Japan's got to solve its problems, and what one wants to avoid is people doing dumb things that will make it harder, such as slipping into protectionism or trade conflicts.
But by and large, for the emerging markets, if they can participate in financial support through the IMF arrangements as they have before or through special agreements to borrow, that can be constructive, but I don't think that, for example, in the Eurozone, that people should be looking for a silver bullet from the Chinese when the per capita income in China is about $4,000 a person and it's about $38,000 in Europe.
MR. FERGUSON: Thank you. We have time for one more question.
OPERATOR: The next question is from Ruben Barrera from Notimex.
QUESTION: Yes, thank you for doing this. Mr. Zoellick, I would like to go back to the issue of Greece, and my question is, if--do you think that this position by the Greek authorities to seek a referendum on the bailout could set a bad precedent for a future rescue plan for other countries, either in Europe and other parts of the world?
MR. ZOELLICK: Well, ultimately, countries have to make their own decisions here. I mean, my--I guess the theme is whether it's a group of countries or individual countries, they need the political support and they have to take the tough actions. So, I'm not in a place to second-guess the Greek political authorities feeling about what sort of vote of confidence or referendum they need.
I did say it's a roll of the dice. If it passes, that could be a positive signal for people. If it fails, it's going to be a mess.
And one of my concerns is that, in the meantime, it adds to degrees of uncertainty. Europe can cope with that if it has the additional support and facilities that we've been discussing because Greece is only about 2 percent of the EU's GDP. But at this moment, it adds one other element of uncertainty in what's already a difficult time.
MR. FERGUSON: Thank you very much. I'm afraid that's all we've got time for today. So, thank you for calling in and goodbye.
MR. ZOELLICK: Thank you.
MR. FERGUSON: Thanks, good-bye.
