The world is facing "a high probability of a deep and prolonged recession," with the most pronounced effects felt in industrialized countries, U.S. Bank Vice President John K. Walsh said Friday.

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The world is facing “a high probability of a deep and prolonged recession,” with the most pronounced effects felt in industrialized countries, U.S. Bank Vice President John K. Walsh said Friday.

And U.S. Treasury Secretary Henry Paulson’s decision this week to change the direction of the $700 billion bailout plan is only increasing uncertainty and delaying improvements, Walsh said.

“I’m disappointed the U.S. government is not coming in to buy those mortgage-backed securities,” he said, adding the move would have taken the crucial first step in determining the price of the troubled assets. The prices would then be reflected on bank balance sheets.

Walsh, who manages South Asia, Middle East and Africa for U.S. Bank’s overseas-banking division, spoke at a meeting of the Trade Development Alliance of Greater Seattle, which promotes the region in international markets.

Paulson said that Treasury would switch from its initial plan to buy troubled mortgage assets and instead focus on building bank capital and shoring up credit-card, auto-loan and other nonbanking businesses.

The uncertainty in the federal government’s response is rattling investors, Walsh said.

Meanwhile, the financial crisis has spread around the world, leaving few countries unscathed.

The credit crunch has led to a dramatic decline in bank lending in Central and Eastern Europe. Many countries there carry large account deficits that need to be financed, but funds are more expensive and fewer banks are willing to lend.

Latvia and Estonia are already in recession, and Romania’s debt has been lowered to junk-bond status, Walsh said. They’ll likely need outside assistance from the International Monetary Fund (IMF), which has already come in to support Ukraine and Hungary.

Turkey’s economy was a bright spot, rebounding strongly from a banking crisis in 2001 by instituting new regulations and better credit-management systems, Walsh said. But the government relies on short-term capital inflows, which are drying up in the credit crunch. Consumer and business confidence in Turkey is falling.

The credit crunch is also affecting investments in oil and gas development for future supplies around the world, from Brazil to Kazakhstan, Angola, Nigeria and Australia, Walsh said.

Investments have to be made years ahead to meet demand when current oil fields dry up by about 2012, he added.

Russia is not developing any new fields now because its large oil companies rely on foreign investment, which isn’t flowing into the country.

Russia has been living off windfall oil profits as a result of strong oil prices and trying to assert itself economically and politically.

“But the lower price of oil is certainly going to affect its ability to continue with that,” Walsh said.

Countries in Latin America and Africa haven’t been as exposed to global financial markets but will still feel the effects of the global slowdown in falling commodity prices.

Countries with money to invest through sovereign wealth funds, such as Saudi Arabia, Kuwait and Qatar, have suffered huge losses in the U.S. financial sector, so they are cautious.

The crisis has damaged the reputation of Western economic model and is causing a shift in power. The role of the IMF will expand beyond emergency lending. It may get involved in global regulation, Walsh said.

Developing countries such as China and India are also likely to have greater influence on decision-making in the world economy.

China announced its own $586 billion bailout plan focused on infrastructure spending. That plan will help to some degree, Walsh said, but China is already spending on rebuilding its railways, highways and other projects.

The effect of the stimulus package depends on “how much is really new money,” he said. “Given the opaqueness of Chinese government pronouncements, it’s really unknown.”

At least China and India still have an appetite for purchasing U.S. debt, Walsh said.

In an environment where investors are fleeing to safe havens, “the U.S. is still viewed as the safest in the world.”

Kristi Heim: 206-464-2718