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China slowdown bigger headache than ECB’s QE: Prof Rogoff

The 45th annual World Economic Forum kicked off today at Davos. CNBC-TV18’s Menaka Doshi is speaks to Kenneth Rogoff, Professor of Economics, Harvard University about the impending ECB move.

Below is the transcript of Kenneth Rogoff’s interview with CNBC-TV18’s Menaka Doshi.

Q: It is expected that the ECB will announce a sovereign bond buying quantitative easing (QE) programme of about 500 billion euros. Is that going to be enough, how severe is your deflationary problem, can the ECB fix it?

A: If they don’t do something like that it is going to help the euro which has been going down. It is going to have rates in places like Spain which have been going down, start going back up. So, they have to do it. Will it fix their deflation problem? I think it is not going to be enough, I think they are going to have to do more, may be even change what they say about inflation. However, look at this as a first step on a journey or another step on a journey, it is not the end.

Q: Do you think it might have been more effective if they were to announce I trillion euro programme or do they need to keep some of that ammunition in-store for future?

A: What you want to do is say we are going to keep doing this till it works. We are aiming at 2 percent inflation, we are going to make it happen.

They really should say we are not just aiming to touch 2 percent, we are aiming to average 2 percent. If it goes to 3 percent for a little while to make up for the fact that it has been below 1 percent. We are okay with that. If they said that it would be much more effective but one step at a time.

Q: In anticipation of what the ECB will do we saw moves by Swiss National Bank last week. It was stunning and adding to this fear of currency volatility through the course of the year. Now there is talk that Denmark might consider depegging the Krone. It has cut interest rates just yesterday. Do you see more European countries doing this in anticipation of where the euro might go?

A: That is an interesting question because we do not know where the euro will stop. It really could fall quite a bit further if Mario Draghi is successful in pushing ahead with his QE programme. I think it is a natural outcome of things with Europe being in recession, growing very slowly for it to have its exchange rate falling. Frankly it has been a bit of a puzzle that it hasn’t happened sooner. So, it is a positive thing in the world economy but as I said if they don’t deliver something with the QE we are going to have a problem.

Q: How big a challenge does Europe pose to the global growth issue? Do you think that it could potentially because I was speaking with Edmund Phelps and he said Europe could implode not just because of its financial issues but also the recent terrorism incident that we have seen. How big a challenge does it pose?

A: I do not quite see the connection there. The biggest issue in the world is China right now. China’s potential impact, it is still an emerging market, it is much more volatile, I don’t think Europe is going to melt down,. It is looking old and moving very slow, not able to adjust. However if Europe did melt down, it would be catastrophic.

Q: The chances or the possibility of that is low as you would rake the possibility of a Greek exit because we will see the Greek election take place later this week?

A: I think a Greek exit is very unlikely. It is very destructive. Greece isn’t going to pay its debt. Eventually they all are not going to pay it in full then instead of just pushing it into the future they are going to do something to recognise that. Howeve,r you can’t ever predict in politics. We would not have wars if crazy things didn’t happen.

Q: You spoke of China, isn’t the world coming to accept a slower growth rate from China? We are already seeing that play out in commodities across the world, not just what we have seen with crude prices but pretty much all natural resources that have been at big lows this year because of the slowdown in China?

A: India is coming to accept it. It has been great for India but countries like Russia, Brazil, Venezuela, Argentina, Nigeria it is very painful. They should have realised this couldn’t go on forever, they should have diversified their economies more, but they did not. So, for those countries it is a tough adjustment. For the importers of commodities especially energy this has really been a boon. I think it’s the big story in the world economy today is the fact that oil prices have fallen so much is partly due to China.

Q: Are we at the beginning of a super down cycle for commodities, is that decisive?

A: Commodities are very volatile, they are very difficult to predict. It is unusual, for example oil prices were very stable this summer even though there was lots of stuff going on. The norm is that it moves around a lot. So, I think that is all we really can say. However, when you want to predict commodity prices it is often difficult to do better than say they will be what they are today. It has fallen and if you want to guess where it is going to be in a year or two, I hear a lot of oil executives saying it will be back up in two years, I wouldn’t hold your breath, it might, but it might not.

Q: You just came back from a visit from Russia not very long ago. One of the questions that business leaders are grappling with as are economists, is Russia about to default because of what we have seen with oil prices?

A: They don’t have much government debt. It is less than 10 percent of GDP. However, they have huge corporate debt, they have a lot in dollars and the reserves aren’t even enough to cover that. So, if oil prices stay low for a long time it is inevitable that we will see wave of defaults – corporate defaults. Sometimes those are then guaranteed by the government and they morph in the government defaults. If you look at Spain, Iceland and Ireland, we have seen how bank debts can become government debts, that could happen in Russia. I think Russia will be really fortunate to come out of this without really having a deeper financial crisis.


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