OECD warns on banks, deflation

ROME (Reuters) - The Organization for Economic Cooperation and Development and other major institutions would not be surprised to see the failure of another big international bank, a top OECD official said on Wednesday.

"The OECD, the IMF, all of us, we expect, we wouldn't be surprised if there was another failure of a big bank," OECD Vice Director General Pier Carlo Padoan said at a news conference in Rome.

Padoan also told reporters the danger of international deflation needs to be taken seriously and he saw "a high risk" of a global liquidity trap.

"This is the real risk we have to face," Padoan said, referring to the likelihood that "market expectations are so depressed that despite massive economic measures the liquidity made available is not used."

Padoan said deflation, or the risk of depressed demand and a persistent fall in consumer prices, had rightly become a consideration for policymakers in developed countries.

"The risk of deflation should be taken seriously considering the speed of the fall in raw material prices and the fact that the recession will bring a slowdown in demand," he said.

"Our forecasts point to recession and a fall of prices,"

In other remarks, Padoan said the wide spread between Italian 10-year government bonds (BTPs) and their German equivalent (Bunds), at around 1.25 percentage points, was fully justified by financial and economic conditions.

Padoan said in view of the risk of spiraling debt servicing costs, Italian Economy Minister Giulio Tremonti was justified in having presented a relatively modest stimulus package which would not cause a ballooning budget deficit.

"You can't say Tremonti is wrong, he is being prudent for this reason," Padoan said.

Tremonti was criticized over the stimulus unveiled last week, which analysts said had expansionary measures worth only around 0.3 percent of gross domestic product and would do little to help the flagging economy.