Improved Firewall Should Prevent Debt 'Ebola': OECD's Gurria
The latest boost in the International Monetary Fund’s lending power should help in preventing a potential debt 'Ebola' from contaminating the rest of Europe, Angel Gurria, the Secretary-General of the Organization for Economic Co-operation and Development (OECD) told CNBC on Tuesday.
"I don't think one can overestimate contagion," Gurria said on CNBC Asia's "Squawk Box" program from Japan. "Contagion is instantaneous, it is severe. It's like Ebola. Once you realize you got it, you have to cut off your leg in order to survive."
"We should be fast and we should focus. And this is what this firewall is about," he added, referring to the trillions of dollars of funding that the euro zone and other Group of 20 (G20) nations have pledged to help deal with a potential fallout from the debt crisis.
Gurria, a former Mexican finance minister, said the Greek debt crisis spread to the rest of Europe because the international community did not "ring fence it fast enough".
"We should not do that with any other case," he added.
G20 nations pledged another $430 billion to boost the International Monetary Fund (IMF)'s lending power over the weekend, more than doubling its firepower to ensure the Fund can respond effectively should the debt problems that have engulfed euro zone countries spread and threaten the global economy.
This is on top of the 800 billion euros ($1.05 trillion) that the 17 euro zone countries have committed in early April and the one trillion euros provided by the European Central Bank in cheap loans under the so-called Longer-Term Refinancing Operation.
Despite the increased firepower, yields on Spanish bonds have been rising in recent weeks as investors have grown worried about Europe’s fourth-largest economy, which is reeling from a real estate bust.
But Gurria told CNBC, Spain won’t need a bailout and the country didn’t face the big external imbalances that brought about the crisis in Greece.
"Spain has about half the debt of Italy as a proportion to GDP, about 40 percent that of Greece," Gurria said. "They had 5 years of (budget) surplus in a row before the crisis and they basically addressed the several vulnerabilities that they showed after the crisis, which was the question of their budget, their labor market flexibility, pensions and they are now addressing the capitalization of their financial institutions."
Spain's central bank said Monday that the economy contracted 0.4 percent in the first quarter from the fourth. On an annual basis, the economy shrank 0.5 percent, the first contraction after seven consecutive quarters of growth.
A decline in economic activity may make it difficult for Spain to its achieve ambitious austerity targets. The Spanish government had pledged to cut spending and increase taxes by 27 billion euros ($35.6 billion) in its 2012 budget.
Gurria said the Spanish are definitely "on their way" to restructuring the economy and implementing long-term reforms to boost growth.
"The only thing that I would tell them is that they probably took too long to start their reforms but they are on their way, they are exemplary in terms of their reforms so that means, in the medium and long term, (they) look good," he said.