Central Banks

Thursday, November 10, 2011 - 14:21

Bernanke: EU Must Implement Firewall Vs Debt Crisis Risk

(MNI) - Warning of potentially serious repercussions from the metastasizing Greek debt crisis, Federal Reserve Chairman Ben Bernanke urged European governments to swiftly implement measures to strengthen banks and erect a "firewall" to insulate other debtor nations.

The Fed chief said the U.S., not just Europe, stands to suffer economically and financially if the situation is not stabilized soon.

Bernanke, answering questions from soldiers and family members following a speech at Fort Bliss in El Paso, Texas, said the U.S. economy is not doing as well as the Fed would like despite three years of zero short-term interest rates and massive asset purchases to push down long-term rates.

But he spoke optimistically about the longer term -- provided the U.S. gets its own debt problems under control.

His main focus -- largely absent from prepared remarks -- was on the highly fluid situation in Europe, which has been roiling financial markets. As he spoke, stocks were recovering some of the heavy losses incurred Wednesday when political turmoil drove bond yields sharply higher in Italy and heightened fears that the Greek contagion could spread to other nations and possibly undermine the euro-zone.

Bernanke made clear he is quite concerned about the situation in response to questions. "There is a lot of stress now in the euro zone," he observed. "So far (European authorities) have obviously not stopped the crisis."

Alluding to a tentative plan agreed by European leaders in late October to slash Greece's privately held debt by 50%, recapitalize European banks and beef up the European Financial Stability Facility, Bernanke said, "It's really important that they implement those steps forcefully."

Without stabilization of the European debt situation, the financial system worldwide could "come under enormous pressure," he said, and that would be "very bad for the economy."

"It's very important they do that" and "restore confidence," he reiterated.

Asked about how the U.S. economy might be impacted, Bernanke said "there's definitely a significant risk there."

"The world's financial markets are highly interconnected, so if there were to be a substantial increase in financial stress in Europe ... due to a default by one of the countries, that would create a freezing up of credit, a withdrawal of short-term funding, a fall in stock prices not just in the EU but around the world," he said. He added that "as the financial system freezes up" it would have "very serious implications" for the economy.

The U.S. economy is "not insulated from" Europe's debt problems, he said. The Fed would "do all we could to ... minimize the damage," but "we wouldn't be able to escape the consequences of a blow-up in Europe."

So Bernanke repeated that "it is very, very important that they try to address these issues."

Bernanke stressed the need for the U.S. to put its own debt on a "sustainable" path. And, in a reference to the August battle over the debt ceiling that led to a downgrading of U.S. government debt by Standard & Poor's, he said Congress and the White House need to "stay away from that brinkmanship."

Noting that the congressional Super Committee has to "address long-term fiscal issues," he said "it's very important to do it the right way or it will cause a lot of problems."

Asked about the odds of another credit agency downgrade and the impact that would have, Bernanke initially downplayed the threat, noting that interest rates fell following the S&P downgrade and that U.S. Treasury securities have retained their "safe haven" status in the midst of the euro-zone crisis.

Having said that, though, Bernanke said the U.S. is "not on a sustainable fiscal path" and warned that, without changes in projected deficit spending, "the national debt will begin to accelerate" and "get completely out of control."

"It's very important we take measures to establish a stable path for our debt over time," he said adding that the costs of health care for an aging population pose the biggest challenge.

After vowing in his speech that the Fed will "focus intently" on reducing unemployment and do all it can to restore prosperity, Bernanke was asked whether the U.S. is destined for a lasting downshift in standards of living.

He replied that the economy is now "experiencing a hangover" from pre-mortgage crisis excesses, and he said the Fed is "trying to get the economy moving" and reduce unemployment. He said that is "taking time" and said "people are understandably impatient and worried."

"Unemployment is too high," he said, because "we got knocked down, and we haven't gotten all the way back up ... . There is a ways to go before unemployment is back to normal."

Bernanke said the Fed is "not the only government agency that has influence on employment" but said it is "trying to help by keeping interest rates low."

But he expressed longer term optimism, echoing comments in his speech.

"The U.S. economy remains the largest in the world, with a highly diverse mix of industries and a degree of international competitiveness that, if anything, has improved in recent years," he said. "The United States continues to be a great place to do business, with a strong system of laws, an entrepreneurial tradition, and flexible capital and labor markets. And our country remains a technological leader, with many of the world's leading research universities and the highest spending on research and development of any nation."

"Ultimately, these strengths will reassert themselves if our country takes the steps that are necessary to prepare for the future -- for example, by putting the federal budget on a sustainable path and improving our primary and secondary education system," said Bernanke.

"The Federal Reserve will certainly do its part to help restore high rates of growth and employment in a context of price stability," he added.

** Market News International **

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