Europe crisis threatens US economy, banks: Fed

Europe's debt crisis poses a "potentially serious" risk to the US economic recovery because it threatens global credit markets and international commerce, a top Federal Reserve official said on Thursday. Fed Governor Daniel Tarullo said Europe's debt woes, if not contained, could cause financial markets to freeze and spark a global crisis akin to the market meltdown of late 2008.
Until last week, Fed officials had been playing down the possible impact to US economic affairs from Europe's turmoil. "The European sovereign debt problems are a potentially serious setback," Tarullo said in testimony prepared for deliver to two congressional subcommittees. Thursday marked another turbulent day in global financial markets. US stocks plunged about 2.5 percent and investors fled from risky assets around the world. The euro, which this week hit a four-year low, was again under pressure.
Investors' anxiety still centres on Greece, but fears have grown that even the roughly $1 trillion emergency fund put together by the Europe Union and the International Monetary will not be enough to solve Europe's debt problems. "Investors are aware that this package cannot ultimately relieve the need for real, and likely painful, fiscal reforms in the euro area," said Tarullo.
"If sovereign problems in peripheral Europe were to spill over to cause difficulties more broadly throughout Europe, US banks would face larger losses on their considerable overall credit exposures," Tarullo said. "In addition to imposing direct losses on US institutions, a heightening of financial stresses in Europe could be transmitted to financial markets globally."
To some extent, financial markets are already showing signs of increased strain, buttressing the view of those who believe the Fed will likely leave US interest rates near zero percent until sometime next year. The US economy has been recovering relatively quickly since hitting a bottom in the summer of 2009. Gross domestic product, the broadest measure of total economic output, jumped at a 3.2 percent annual rate in the first quarter.