Treasury Secretary Tim Geithner says the U.S. is unlikely to be hurt by any fallout from the European debt crisis. That's because "our economy is getting stronger. We're seeing a lot of strength, improvement and confidence," he tells Bloomberg TV. But there are reasons why he may be wrong.
The euro dropped below $1.25 this week on concerns that Greece won't be able to adjust its spending and that the Greek crisis would spread to Spain and Portugal. Deutsche Bank (DB) Chief Executive Officer Josef Ackermann expressed skepticism about Greece's financial future. Spain and Portugal have said they will adopt austerity measures.
In the case of all three nations, strong unions oppose the cuts, and that's likely to cause social and political unrest. Ongoing strikes could cripple national economies. European Central Bank chief Jean-Claude Trichet says Europe's economy is in its deepest crisis since World War II, or even World War I, according to German news weekly Der Spiegel.
There's also some concern that if the financial obligations that Germany, the largest economy in the region, become too onerous, it may pull out of the eurozone rather than harming the nation's balance sheet.
Geithner Silent on Potential Problems
Geithner skirted two key issues. The first is that the large U.S. banks hold an unknown amount of sovereign debt from European nations. Most American financial firms probably hold securities in European banks. Defaults on any of these bonds could hurt both U.S. bank capital ratios and earnings.
The other potential problem is that Europe is a large trading partner with the U.S., and many American exporters rely on their ability to sell goods in the region. If the financial situation in several eurozone nations deteriorates either because of new high taxes or unemployment's effects, it could do significant damage to American exports.
Geithner knows all this. But the Treasury Secretary must have decided it was best to have these issues remain unvoiced.
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