Thursday, 1 December 2011

Fed's Bullard lauds swaps, no single euro debt fix

St. Louis Fed President James Bullard on Thursday welcomed central bank efforts to make dollar loans to European banks cheaper but warned against expecting a quick fix to the continent's debt crisis.

"I do not think you should expect the crisis to be solved with a silver bullet, so that expectation should leave the market," Bullard said at the Bloomberg Hedge Funds Summit.

This week, the Fed and five other major central banks acted to contain the crisis by lowering what they charge commercial banks for short-term dollar loans, known as liquidity swaps.

The move recalled coordinated central bank efforts from 2007 to 2009, including those designed to help banks cope with the collapse of Lehman Brothers.

Bullard said efforts then were vital in preventing an even bigger global banking crisis, adding that "to the extent that we are possibly coming into something like that it makes sense to bolster our position there." 

But he stressed that he expected neither a one-off solution to the European debt crisis nor a euro zone collapse. Instead, it would take a long time for heavily indebted countries to tighten their belts and return to fiscal health.

"You should put the focus squarely on those countries and those politicians that have borrowed way too much," he said.

Stock markets and the euro initially rallied on the coordinated central bank operation. Worries about Europe's debt crisis and possible losses at banks that have lent money to troubled euro zone governments have made it harder for those banks to secure dollar funding in the market.

Though he admitted Europe's problems were increasing market uncertainty, Bullard said fears the United States would fall back into recession this year have receded.

Growth in 2012, he added, may be even stronger, "provided we can get past the European situation without a global macroeconomic shock."

In such a scenario, he said the Fed could revisit some of the emergency liquidity operations it employed in 2008-2009, including making it easier for banks to borrow at the Fed's "discount window."

"We could reopen those if the situation got more dire and we thought some bigger institutions were having trouble," he said.

(Editing by Andrea Ricci)