World Bank head sees ripple effects from euro woes

Robert Zoellick, president of the World Bank Group, answers a question from the audience at the John F. Kennedy School of Government at Harvard University in Cambridge, Massachusetts November 29, 2011.

CAMBRIDGE, Massachusetts (Reuters) - Europe's debt crisis threatens to undermine consumer confidence and cut off credit to businesses in the rapidly emerging markets that have been bright spots in an otherwise grim global economy, the head of the World Bank warned on Tuesday.

"While the European and euro zone problems have to be dealt with primarily by Europe, you've got to be aware of the ripple effects of this and the ripple effects can easily become wave effects," Robert Zoellick, the institution's president, said in a talk with students at Harvard University.

Leaders of the euro zone nations have been scrambling to head off a spreading sovereign-debt crisis that has hit the Greek, Italian, Portuguese and Irish economies and threatens to engulf the rest of the 17-nation bloc.

One key risk Zoellick cited is that worries about Europe's troubles will spook consumers in emerging markets, such as China, India and Brazil, that have been far quicker to recover from the private-sector credit crunch of 2008.

"What I was most worried about and remain worried about is the fact that if the problems in consumer confidence ... and business confidence in Europe and the U.S. spread to emerging markets then the domestic demand of those economies would also wither," Zoellick said.

"Keep in mind that over the past five years, two-thirds of the world's global growth has come from emerging markets. So it's not only bad for emerging markets, but it's bad for the world."

Major U.S. multinational companies including General Electric Co and Caterpillar Inc have notched solid profit growth this year in part because strong emerging-market demand offset weakness at home and in Europe.

Another worry is that banks, many of which still bear the scars of the 2008-2009 crisis, will sharply cut back lending as they try to assess the damage that investments in European sovereign debt could do to their balance sheets, said Zoellick, who has headed the World Bank since 2007.

"You have a banking sector that is pulling back fast. Part of this is because of banking regulations and some of this is because they're not sure how to value the sovereign debt. But so what are we seeing? We're seeing trade finance dry up," Zoellick said, adding that he was particularly concerned about the effect this could have on businesses in West and North Africa, Central and Eastern Europe and the Middle East.