por RCHF » Mar May 25, 2010 4:03 pm
May 25 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said the European debt crisis probably won’t derail the U.S. or global economic recoveries.
“There are several reasons why this new threat to global recovery will probably fall short of becoming a worldwide recessionary shock,” Bullard said today in a speech in London. “Sovereign debt crises have been with us for many, many years. There is nothing intrinsic about such crises that they need to become important shocks to the broader, global macroeconomy.”
Some Fed policy makers said during the Federal Open Market Committee meeting on April 27-28 that Europe’s debt crisis may weaken the global recovery and impair U.S. financial markets, according to minutes of the meeting released last week. At the same time, Fed officials raised their U.S. growth estimates for this year to a range of 3.2 percent to 3.7 percent.
“Recovery generally remains on track,” Bullard said in the text of remarks prepared for a seminar hosted by the European Economics and Financial Centre. “Growth in real GDP is expected to continue through the current quarter, making for a full year of growth in national income.”
The U.S. may benefit from the crisis in Europe “because of the flight-to-safety effect that pushes yields lower,” he said.
U.S. stocks pared losses after Bullard said markets don’t face the same stresses as they did in 2008 and 2009. The Standard & Poor’s 500 Index slumped 2 percent to 1,052.62 at 1:11 p.m. in New York after dropping as much as 3.1 percent earlier.
Currency Swaps
The Fed authorized temporary currency swaps with the European Central Bank and other central banks this month, responding to strains in European markets. European leaders pledged a rescue package of about $930 billion to counter a mounting debt crisis and restore confidence in the euro.
“The swap line with the ECB during 2008, 2009 got to very high levels, hundreds of billions of dollars,” Bullard said in response to audience questions. “So far, the take up this time around has been pretty minimal -- a few billion dollars. It’s been small.”
Credit-default swaps on global banks don’t indicate the debt crisis is as severe as during the past global recession, Bullard said.
“I think government guarantees are playing a major role here,” he said. “Governments have made it very clear over the course of the last two years that they will not allow major financial institutions to fail outright at this juncture. Because these too-big-to-fail guarantees are in place, the contagion effects are much less likely to occur.”
Banks’ Reluctance
The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to 31.1 basis points from 28.4 basis points. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, surged to 364 basis points, or 3.64 percentage points, after the collapse of Lehman Brothers Holdings Inc. in September 2008.
Bullard’s comments were similar to those of General Electric Co. Chief Executive Officer Jeffrey Immelt yesterday. “In Europe, I think this is going to be solvable,” he said in an interview. “I don’t think it’s enough to slow the recovery, I really don’t.”
The euro last week touched its lowest level in more than four years against the dollar on concern European measures to reduce fiscal deficits will undermine the 16-nation currency region’s recovery.
“Let me also stress that the current agreement in Europe does buy substantial time for European governments to enact fiscal retrenchment programs,” Bullard said. “It will take time for those programs to be enacted and to gain credibility with financial markets.” That process will “probably play out over years, not weeks.”