US policymakers see few signs of liquidity stress from Europe spreading across the Atlantic so far but they still fear a range of subtle and indirect channels by which the eurozone could drag the world’s largest economy down with it.
Those fears help to explain the Federal Reserve’s part in co-ordinated international action on Wednesday to make sure that banks have access to short-term loans in a range of currencies if they need them.
“US financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets,” said the Fed in its statement. “However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions.”
The concern is not direct trade links: US exports to Europe are such a small part of the economy that even a vast eurozone recession would barely touch US growth. Instead, the worry is over potential shocks to the US financial system.
“The danger for the US is not trade and, as far as the banks are concerned, it’s not even their direct exposure,” said Paul Ashworth, chief US economist at Capital Economics in Toronto. “It’s more an indirect exposure.”
Even if a large bank in a core European country such as France were to fail, a widespread assumption is that it would be nationalised, and that losses to US banks would be limited.
The much greater danger is contagion via financial markets. Some Fed officials believe that repeated shocks from the eurozone, which have increased uncertainty and volatility in asset markets, are the single largest reason why US growth in 2011 has been so disappointing.
FT
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