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What European debt means to US banks

 

Professor's Profile
PersonsName

Robert Sicina

Title:
Executive in residence

School:
American University

Type "European debt crisis" in Google's search engine, and you will see about 30 million hits. Experts in government, business, banking and academia have a lot to say about debt issues in Europe -- and so do concerned members of the populace. What does it all mean to U.S. consumers? In this interview, Robert Sicina, executive in residence at the American University Department of International Business, discusses how this crisis has the potential to cause a double-dip recession in the U.S., how the U.S. needs to change its economic game plan to stay in the game at all and more.

Question What is the significance of European debt issues on the economy in America?

There is a very real risk the debt issues in Europe might result in a double-dip recession in the U.S. Our recovery is both anemic and fragile. If the European Union goes into a recession and therefore buys less of our goods, that could tip us over the edge into another downturn.

Question What are the odds of a global credit event, like what was seen in 2008 following the failure of Lehman Brothers, resulting from Europe's debt crisis?

Answer A Lehman-like event is quite unlikely. Lehman led to a freezing of the credit markets -- banks would not lend to each other -- because the risks banks had assumed, mostly with credit default swaps, were opaque to their counterparty banks. Institutions didn't know the level of risk (losses) their banking counterparties had assumed.

The risks the banking system has assumed with the European credit crisis are large but transparent. Furthermore, government officials seem to have learned from the '09 credit crisis that the need to step in quickly to backstop the banking system is critically important to the health of the economy.

Question What steps should the supercommittee have taken to prevent a similar crisis from eventually occurring here in the U.S.?

Answer The committee needed to step up to the challenge of compromise and create a package of spending cuts and tax increases to put us back on a track toward reality. We are living beyond our means. The committee needed to address that reality and respond to their responsibility to govern rather than stand on rigid principle.

QuestionIn your opinion, what aspect of Europe's debt situation is significant to U.S. consumers but isn't getting enough attention?

Answer We need to accept that we have been living in the same kind of unrealistic circumstances as Greece and Italy. We have to accept a balanced set of budget cuts and tax increases that, painful though they may be, will bring us back to the reality of living within our means. If we don't get back to a better alignment of government revenues and expenses, there is a very real risk we will drift, over time, toward the path of Italy that had among the lowest growth rates in the world over the last 10 years, just above Haiti and Zimbabwe.

Special thanks to Robert Sicina, executive in residence at the American University Department of International Business, for sharing his insights in this interview.

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