European Central Bank: Inaction puts global recovery at risk

How unwieldy Europe is to manage!  How difficult it is for EU institutions to act…

Bruce Kasman, Chief Economist of JPM, whom I remember from my years at the New York Federal Reserve in the early 90s where he was an international economist, said this morning in a conference call that the main risk to the US economic recovery is contagion from the debt crisis in Europe.  European banks are large holders of government debt, and stresses in these institutions could spill over into funding pressures for US financial institutions, as well as for Latin American institutions. 

Kasman argued that Greece, experiencing a crisis of solvency rather than liquidity, must be ring-fenced, and other highly-indebted members of the euro area — Portugal, Spain, Italy and Ireland — must receive ECB support.  He said that the ECB must act quickly to reassure the markets that there will be ample liquidity for these other countries, so the Greek contagion can be contained.  More aggressive ECB liquidity lines and expansion of the dollar-swap facility with the Federal Reserve are needed.  This will reassure the markets that, unlike Greece, these countries are not insolvent and that policy adjustment in these countries (deficit reduction) will be enough and will be undertaken. Otherwise funding costs for these countries could rise markedly, making insolvency a self-fulfilling prophecy.  Kasman said that the results of the ECB meeting yesterday were, in this regard, disappointing.