Tags: Fed | US | Europe | Meltdown

Fed’s Plosser: US Can Handle European Meltdown

Tuesday, 29 May 2012 09:11 AM

The U.S. economy can withstand a meltdown in Europe, as many financial firms have cut exposure to the crisis-ridden continent and could actually benefit from a flight to safety, says Federal Reserve Bank of Philadelphia President Charles Plosser.

"Europe is clearly near recession. That impacts the U.S. in part through trade. That has negative impacts but Europe is not our largest trading partner at the end of the day," Plosser tells The Wall Street Journal. "The thing that people really worry about is you have some financial implosion in Europe and markets freeze up and you have some serious financial disruptions."

The Federal Reserve has urged money market funds to insulate themselves from Europe, and financial institutions have taken steps to ensure a meltdown in Europe doesn't rattle the U.S. economy too much.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

Market worries have persisted that debt-ridden Greece will abandon the euro, which could pressure Spain and possibly Italy to consider following suit and send shockwaves across global financial systems.

Under such a scenario, the U.S. financial system could actually see liquidity rushing in as investors worldwide seek flight to safety.

"People have made the analogy that an implosion in Europe would be a Lehman Brothers-type event. It might be a Lehman Brothers-kind of event for Europe," Plosser says.

"There’s another scenario that is exactly the opposite. There might be — and you already see some of this — a flight to safety. So rather than the markets freezing access to short-term funding for U.S. institutions, you could have a flood of liquidity that gets withdrawn from European institutions, if that’s who they’re worried about, and floods into the United States."

Markets breathed a sigh of relief recently, as polls have shown Greece's conservative New Democracy political party is gaining ground ahead of June 17 parliamentary elections.

A strong showing could lead to a coalition government favoring sticking with the euro, while a strong showing by the leftwing Syriza party could see a coalition government rejecting austerity measures attached to multilateral bailout funding.

New Democracy chief Antonis Samaras has said Syriza has not painted a clear picture of what ditching belt-tightening austerity measures would mean for Greece.

"If Greece unilaterally rejects the bailout deal it will be isolated for years ... It will have no food, no drugs, no fuel. It will have to live with permanent power cuts," Samaras told party supporters, according to Reuters.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

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Tuesday, 29 May 2012 09:11 AM
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