Developed world faces Japan-style lost decade-ECB's Kranjec

LJUBLJANA Nov 24 (Reuters) - The world's advanced economies could be faced with a decade of ultra-low growth similar to Japan's experience since the 1990s, European Central Bank governing council member Marko Kranjec said in an interview to be published on Friday.

The economic slowdown of the euro zone will be "significantly longer than we expected", and economies in general will have to accept smaller growth, possibly also zero growth, he said.

"I would not be surprised if the developed world would lose a decade. If it would grow as slowly as Japan did in the last 10 years," Kranjec said, according to an advance copy of comments made to Slovenian weekly Mladina.

Japan has run interest rates at or close to zero for years in a bid to fend off prolonged weak economic growth and deflation. With its economy suffering from the aftermath of an earthquake and nuclear crisis earlier this year, it has pledged to keep rates low for several more years.

The ECB's own rates now stand at 1.25 percent and analysts see an even chance that it will cut them back to a record low of 1 percent in December given signs that the euro zone is slipping towards recession.

European Central Bank Governing Council member

Kranjec added that he believed there was sufficient political will in the euro zone to preserve the euro. He said a significant amount of Greek debt would have to be written off, but that no member country should leave the euro zone as that would make things worse for the country leaving and for those who would stay.

"I am an optimist and I believe that everything will be made in the political sense to preserve the euro zone," said Kranjec who is also the governor of the Bank of Slovenia.

"But do not forget that we are in the biggest crisis ever. We will have to go through catharsis and base the system on different foundations," he added.

He said that coordination on the EU level was difficult, causing the markets to react nervously recently, strongly pushing up yields demanded on the sovereign debt of euro zone states.

"The coordination on the EU level is not simple. ... As a consequence economic policy makers ware giving signals that they did not know what to do. And markets immediatelly react to uncertainty."

He also said that European banks were in need of a capital hike while they will also have to lay off employees to adjust their size to the new economic reality.

"I expect the financial sector will be the biggest victim of this crisis," said Kranjec.

He said the main problems in the euro zone were high budget and current account deficits and low economic growth, adding "this problem cannot be solved by financial injections but demands structural reforms".

He said the European Central Bank (ECB) was not allowed to help towards liquidity of the euro zone members by purchasing bonds directly from member states, adding "the ECB's main contribution to economic growth is ensuring price stability". (Reporting By Marja Novak; editing by Patrick Graham)