One false move in europe co.

One false move in Europe could set off global chain reaction http://www.washingtonpost.com/wp-dyn/content/article/2010/05/23/AR.
One false move in Europe could set
off global chain reaction
By Howard Schneider and Neil IrwinWashington Post Staff WriterMonday, May 24, 2010; A01 If the trouble starts -- and it remains an "if" -- the triggermay well be obscure to the concerns of most Americans: amissed budget projection by the Spanish government, thefailure of Greece to hit a deficit-reduction target, a drop inIreland's economic output.
But the knife-edge psychology currently governing globalmarkets has put the future of the U.S. economic recovery inthe hands of politicians in an assortment of European capitals. If one or more fail to make the expectedprogress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broadand unsettling way. Credit markets worldwide could lock up and throw the global economy back intorecession.
For the average American, that seemingly distant sequence of events could translate into another hit on the401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system thatmight make it harder to borrow.
"If what happened in Greece were to happen in a large country, it could fundamentally mark our times,"Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a paneldiscussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.
That local economic development boards are sponsoring panels on government debt in Greece is perhapsproof enough that Europe's problems are the world's. That the dominoes can tumble fast was shown Thursdaywhen a new and narrowly drawn stock-trading policy in Germany helped trigger a sell-off on Wall Street.
It marks a change, Barclays Capital chief European economist Julian Callow wrote in a Friday analysis, froma situation in which the bonds of European countries were considered to carry virtually zero risk to a "bravenew world" where sovereign default in one of the world's core economic areas is a tangible threat. Bankholdings of European debt are now being studied with the same focus given to holdings of U.S. mortgage-backed securities as the global financial crisis unfolded in 2008 -- and with the same suspicion that problemsin one part of the world could wreck others.
The most vulnerable European countries -- Greece, Spain, Portugal and Ireland -- may represent only about 4percent of world economic activity, but "the debt crisis and its ripple effects are bad news for all corners ofthe world," said Cornell University economist Eswar Prasad.
The risk of a worst-case scenario is still considered remote. European countries have pledged hundreds ofbillions of dollars to aid indebted neighbors that run into trouble, and they say they are committed to fixingthe continent's larger economic problems. The euro and U.S. markets were both higher Friday after theGerman Parliament approved a key piece of that support program. A renewed effort by the U.S. FederalReserve to ensure that European banks have adequate access to dollars has generated little demand -- a signthat a feared shortage of cash is not in the offing.
One false move in Europe could set off global chain reaction http://www.washingtonpost.com/wp-dyn/content/article/2010/05/23/AR.
U.S. banks are not heavily exposed to the weaker European countries, Fed governor Daniel K. Tarullo said intestimony on Capitol Hill last week. Banks are in better shape overall, after fresh infusions of capital.
Meanwhile, the U.S. economic recovery has been strengthening through the year, with jobs added in five ofthe last six months, and recent consumer spending and industrial output stronger than most forecasts.
But the fallout from Europe could still be widely felt. U.S. trade officials, hoping the country can dramaticallyboost its exports, are dismayed at the steep drop in the value of the euro -- which is around $1.25, down frommore than $1.50 in November. The decline makes American goods more expensive compared with thoseproduced in Europe. The slide in the common European currency could also change the way China and a hostof Asian countries approach their currency policies, possibly making them less likely to agree with U.S.
demands to raise the value of their money. If they raised it, Asian goods would become more expensive inworld markets, making it easier for U.S. products to compete.
The connections are being closely watched. Analysts are studying how the involvement of Greek financialinstitutions in Eastern Europe, or Spanish banks in Latin America, could affect those economies. TheInternational Monetary Fund and E.U. officials are doing biweekly checks on Greece's progress to ensure itseconomic reform program stays on track, according to Vassilis Kaskarelis, Greece's ambassador to the UnitedStates.
Inside the euro zone, banks are intimately linked, with a web of investments and cross-country bond holdingsthat could be a main vector for financial "contagion," with a default in one country weakening bankselsewhere.
There are some positive impacts in all this for the United States.
For one, uncertainty about European government debt has driven global investors toward U.S. governmentbonds, which in turn is pushing down long-term interest rates. The 10-year Treasury bond had a rate of 3.2percent Friday compared with nearly 4 percent last month. Those lower rates should flow through to privateborrowing, helping Americans getting mortgages or businesses looking to grow.
The European panic is also lowering the price of oil and other commodities on global markets, potentiallymaking it cheaper for Americans to fuel their cars and heat their homes. A barrel of oil went for about $70 onFriday, down from almost $87 on April 6.
A final positive for the U.S. economy is that the stronger dollar will help keep inflation in check by reducingthe cost of imports. That, combined with renewed worry about the strength of the recovery, is likely to givethe Fed some leeway to delay raising interest rates above their current extremely low levels longer than itwould have otherwise.
The most precise comparison is to the East Asian financial crisis that enveloped Thailand, Indonesia, SouthKorea and other nations in 1997 and 1998. There were widespread fears that the crisis would damage the U.S.
economy, including through a financial contagion effect. The Fed even cut interest rates in the fall of 1998 totry to forestall a weakening in U.S. growth.
But there was little obvious impact on the U.S. economy, which grew 4.5 percent in 1997, 4.4 percent in1998, and 4.8 percent in 1999.
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Source: http://prasad.dyson.cornell.edu/doc/WashingtonPost_24May2010.pdf