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Europe Crisis to Shave 1% Off US GDP Growth: Goldman

Wednesday, 14 Dec 2011 | 3:29 PM ET

The European debt crisis is likely to cost already-tenuous U.S. economic growth about 1 percentage point next year, Goldman Sachs economists said.

Whether a massive sovereign debt collapse in euro zone economies will spread to America has been a major question in the markets, causing stocksto stage a slump in each session this week and posing questions about how much worse things can get.

At the heart of the question for the U.S. has been counterparty risk — or the chance that one side won't be able to live up to an agreement — and how much damage will be wrought in the event of a massive European debt default.

Goldman puts the counterparty figure at $1.8 trillion, which is 3.3 percent of the total outstanding debt in the U.S.

Should eurozone banks cut their lending to the U.S. by 25 percent — a round estimate — that would cut about 0.4 percentage points from growth. That in turn would cause a retrenchment among domestic banks that probably would see U.S. gross domestic product lose about 1 percentage point total.

With consensus for U.S GDP growth around the 2.5 percent range, that roughly accounts for Goldman's projection that the overall rate will be 1.5 percent.

Europe: A Concern Into 2012
Will European debt concerns continue to spook the markets next year? Rob McIver, The Jensen Fund, and Ted Parrish, Henssler Equity Fund, discuss.

"A reduction in the lending of foreign banks to U.S. counterparties could have a meaningful impact on U.S. growth," Goldman chief economist Jan Hatzius said in a research note. "While the numbers are not huge, it is important to note that the overall effect could be significantly larger if there are spillovers from the behavior of foreign banks to the behavior of domestic U.S. banks."

Recent data from the Federal Reserve Senior Loan Officers' Survey already points to a slowdown in lending, particularly in the critical commercial and industrial, or C&I, space. While a majority of domestic banks indicated they were loosening standards, a net of 22.7 percent of foreign banks indicated they are tightening.

"The impact of changes in the behavior of euro area banks forms only one part of the potential financial spillovers from the euro crisis. In addition, U.S. banks might also pull back due to their own exposures to euro area assets," Hatzius said. "Overall, we continue to think that the European crisis will subtract around 1 percentage point from U.S. growth over the next year, with banking spillovers accounting for about half this impact."

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