European Countries Need Bank Stress Test: Geithner
US Treasury Secretary Tim Geithner is urging Europeans to conduct some form of a banking stress test, a senior Administration official told CNBC Tuesday.
According the official, Geithner sees stress tests as part of a broader European rescue plan and believes that Europeans also need to increase their stimulus spending in some countries.
The official said European stress tests would be different from those used in the US during the fiscal crisis, adding that Europeans lack TARP-like funds to plug banking capital shortfalls revealed in the stress tests conducted on US banks in 2009.
In such a stress test, Europe would need to resolve mark-to-market on its sovereign debt, added the official.
Geithner believes that transparency from the US stress tests broke the back of the financial panic.
Meanwhile, in the United States, economists have changed their view of how the euro-zone crisis will impact US growth and recovery.
After early confidence that the US recovery could withstand Europe’s fiscal troubles and move forward virtually unscathed, economists are now rethinking their initial assumptions, amid doubts about the continent’s financial-rescue package.
“The real economy is less vulnerable to outright retrenchment after record inventory declines in 2009,” Steven Wieting of Citigroup wrote in a report Monday. “However, we take the weakening of the financial markets seriously as a challenge facing the recovery we expect.”
Some factors that will impact the US recovery, according to Goldman Sachs , are the strong dollar and the weak euro-zone demand for American exports.
In addition, lower equity prices factor in. JPMorgan Chase estimated that the global decline in asset prices has sliced from $1 trillion to $2 trillion from US wealth. Typically, consumers reduce their spending by 3 1/2 cents for every dollar of lost wealth, which amounts to a $30 billion to $60 billion hit to the US economy.
A final factor is the new tightening of credit. However, lower interest rates and cheaper gasoline prices at the pump could soften the blow on the US of the teetering European economies. Oil prices, in fact, could add $30 billion to the US economy.
On balance, economists now predict negative effects on the US will deepen the longer uncertainty lingers in Europe.
It’s unlikely that the Fed’s take on Europe is much different from that in the private sector. The Fed is probably not marking down its forecast for Europe, but it’s certainly not marking the forecast up, as it was doing earlier.