(Updates with comments from the hearing in fifth paragraph.)
Oct. 25 (Bloomberg) -- Failure to resolve the euro-area crisis could result in a renewed global economic weakening and weigh on U.S. trade, said Charles Collyns, the Treasury Department’s assistant secretary for international finance.
“The European financial crisis presents the most serious risk today to global recovery and the prospects for U.S. exports and American jobs,” Collyns said today in testimony before the House Financial Services International Monetary Policy and Trade subcommittee. “Direct exposure of the U.S. financial system to the euro zone countries most under stress is moderate but we are concerned about the risks from our substantial trade and investment ties with Europe.”
The deterioration of Greece’s finances have limited Europe’s ability to battle the contagion, which threatens to pitch the country into default, rattle the banking system, infect Spain and Italy and tip the world economy into recession. European leaders are scheduled to meet tomorrow to craft a solution to the crisis.
“It is clear that the Europeans have the resources and capacity to deal with the challenges they face,” Collyns said. “Leaders made progress over the weekend towards putting in place a comprehensive framework for tackling the crisis. This agreement will need to be implemented quickly and firmly.”
Collyns said there is “strong likelihood” that the Europeans will achieve success. The hearing comes as the 27 EU leaders plan to convene tomorrow.
“There’s clearly a deep commitment from European leaders to reaching a strong agreement over the next few days because there is a deep understanding that failure could have very damaging consequences within the Euro area,” Collyns said.
The elements of the revamped blueprint may include expanding the reach of the 440 billion-euro ($611 billion) European Financial Stability Facility by turning it into a bond insurer and setting up vehicles to raise outside funds, possibly alongside the International Monetary Fund, and a bank- recapitalization strategy.
At an Oct. 23 summit, the leaders excluded a forced restructuring of Greek debt, sticking with the tactic of enticing bondholders to accept losses to help restore the country’s finances, and ruled out tapping the balance sheet of the European Central Bank. Collyns said Europe needs “to take substantial additional acts” and the concern is not “just exposure to Greece but to other sovereigns.”
He said the International Monetary Fund has a “very substantial arsenal of financial resources” for Europe. He said the IMF plays a supplementary role and should not be a substitute for European resources.
“The IMF does play a very constructive role in Europe but equally important that that role continue to be in the context of a strong and comprehensive commitments by the Europeans to dealing with the problems,” Collyns said. “Europeans themselves have the financial resources to deal with this crisis.”
Collyns said the U.S. contribution to the IMF, which is participating in bailouts in the euro region, doesn’t put taxpayers at risk because the lender is the first creditor to be paid back.
“The U.S. taxpayer has never lost a cent” through the IMF exposure, Collyns said. “The IMF plays an ideal vehicle for us to make sure that the European programs are well designed.”
Subcommittee Chairman Gary Miller, a Republican of California, said the U.S. must insulate U.S. taxpayers “by ensuring that U.S. funds are not on the hook for any resolution measures.”
“This is a European problem that must be solved by Europe,” Miller said. “That said there is no question that our economy will be impacted by the success or failure of the measure to resolve the crisis.”
--Editors: Gail DeGeorge, Kevin Costelloe
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