SPILL OVER EFFECT

Global growth prospects for 2011 are bleak. Advanced economies are projected to grow at a slow pace of about 1.5%, down from 3.1% in 2010; and china , a key driver of the global recovery after the 2008-09 financial crisis, is experiencing declining growth for the third consecutive quarter. . In addition, a series of sovereign credit downgrades has hit many developed countries: the If no decisive action is taken, a Greek sovereign debt default is likely to trigger a domino effect, which could affect major European economies such as Italy and Spain, with a severe impact on France, as well as the UK and Germany. In a context of increased global interdependence, developing countries are unlikely to remain immune to the debt crisis in the developed world as my recenr ODI background note xplores. Sooner or later, they will feel the effects along three possible channels: Financial contagion. Balance sheet problems of European banks, volatile stock markets and reduced investor confidence may prompt credit lines cuts and delayed or cancelled investments in the developing world Some developing countries are more at risk than others. Countries most at risk include those heavily dependent on European economies and with a limited fiscal policy room. Mozambique and Kenya, for example, are particularly vulnerable given their strong trade and financial links with Europe, as well as their narrow fiscal space. Tanzania and Uganda are in a similar position because they are highly dependent on European trade flows and lack adequate fiscal policy room. On the other hand, CFA zone countries in West Africa, such as Burkina Faso and Mali, might even benefit from the European debt crisis, since their currencies are pegged to the euro and so their exports are now more competitive in world markets.