Bloomberg News

Fed Says Europe Crisis Boosted Borrowing Costs in U.S.

June 04, 2012

The Federal Reserve said Europe’s debt crisis pushed up costs for U.S. corporations selling debt, with higher-rated financial companies and lower-rated nonfinancial businesses hardest hit by the region’s turmoil.

A 1 percentage point increase in corporate bond spreads in Europe translated on average to a 0.44 percentage point to 0.85 percentage point rise in U.S. spreads between 2009 and 2011, Galina Hale, Elliot Marks and Fernanda Nechio at the San Francisco Fed said in a paper released today.

While the European debt turmoil pushed yields on safer U.S. government bonds to a record low last week, the crisis has increased borrowing costs for U.S. businesses, threatening to impede the country’s three-year-long economic recovery.

Treasuries fell today for the first time in four days on speculation the U.S. economy won’t slow enough to justify holding down yields to last week’s level. The yield on the 10- year Treasury note increased four basis points, or 0.04 percentage point, to 1.49 percent at 12:34 a.m. New York.

The so-called contagion coefficient from Europe to the U.S. is large by historical standards, the researchers said.

Other studies have shown that the 1997-2008 Russian crisis posed a coefficient of about 0.2, and the 1994-1995 Mexican financial crisis had a coefficient ranging from 0.2 to 0.6, according to the authors.

Bonds of the highest-rated nonfinancial issuers were most insulated from shocks in Europe because they tend not to rely on foreign financing, the paper said. Among financial companies, bonds with higher ratings were more vulnerable because highly rated banks tend to be larger and more involved in global capital markets, the authors said.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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