Tuesday

26th May 2020

US rules out eurozone bail-out, as recession looms

  • No US dollars for the eurozone, says the Fed (Photo: Tracy O)

The US Federal Reserve has no plans to contribute to a bail-out of Europe, but a euro collapse would have devastating effects on the economy, its chief, Ben Bernanke, told Republican senators on Wednesday (14 December) at a closed-door hearing.

Several senators confirmed after the meeting that Bernanke said he did not "have the intention or the authority" to provide support for the euro crisis.

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Republican senator Bob Corker of Tennessee said that the central banker had offered this assurance "multiple times" during the one-hour meeting.

"I think people walked away knowing he has no intentions whatsoever of furthering US involvement in the crisis," Corker told reporters.

However, Bernanke also warned of the devastating effect a eurozone collapse would have on the US economy.

"He is very concerned. He did say, if they cannot get their fiscal situation under control, it could affect us. A collapse over there would be detrimental to us," senator Orin Hatch from Utah said.

In a statement put out on Tuesday, the Federal Reserve warned of risks to the economy from "strains in global financial markets," - a reference to the eurozone crisis.

High exposure to European banks is one of the main concerns of the Fed, rather than exposure to European governments' debt, Corker said.

In what seemed to confirm the US central bank's fears, Fitch ratings agency on Wednesday downgraded five of Europe's major commercial banks, warning of more troubles ahead. France's Banque Federative du Credit Mutuel and Credit Agricole, Finland's Pohjola Group, Denmark's Danske Bank and the Netherlands' Rabobank all saw their A ratings downgraded by one notch, amid direct or indirect exposure to government debt in troubled eurozone countries.

According to Fitch, questions over how the eurozone crisis will be resolved and austerity measures taken to varying extents by European governments will affect commercial banking negatively, particularly in southern Europe and Ireland.

Meanwhile, France seems to have come to terms with a potential downgrade of its triple-A rating. "It would not be good news, of course, but neither would it be a cataclysm. The US also lost their triple A rating and continue to borrow on the markets in good conditions," French foreign minister Alain Juppe told Les Echos.

In addition to the banking and sovereign debt downgrades, the European economy is heading for a winter recession, according to a latest estimate by audit company Ernst & Young.

A "mild" recession is likely in the first half of next year, leading to economic growth of just 0.1 percent for the whole of 2012, the firm predicted. Ernst & Young also said unemployment in the eurozone was unlikely to fall below 10 percent until 2015.

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