Eurozone debt: Grave threat to US economy or imaginary boogeyman?

Under grimmest scenario, debt-burdened Greece, Ireland, Italy, and Spain can't pay what they owe to Eurozone banks, which then stumble, causing US banks to falter, too. But US banking system is stronger now, and regulators are more vigilant, say optimists.

By Ron Scherer, Staff writer / August 12, 2011

The shut gate of the stock exchange market building in Milan, Italy, Friday. Under intense pressure from the European Central Bank and eurozone political leaders, the Italian government agreed to bring forward its goal of balancing the budget to 2013 instead of 2014 as originally planned.

Antonio Calanni/AP

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New York

One big concern about the future direction of the US economy is not related to anything happening in the United States. Rather, the angst is over Europe –specifically the banking system in places like Paris, Frankfurt, and London.

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Pessimists worry that the problems besetting some of the nations with weaker economies – such as Greece, Ireland, and Portugal – start to spread to larger nations such as Italy, Spain, and France. Under a worst-case scenario, once those nations start to have trouble borrowing more money, a domino-effect takes place with European banks failing, followed by another banking crisis in the US. This would lead to yet another recession – or worse.

Optimists believe the regulators are on top of the situation. Should another crisis take place, they expect that US Federal Reserve Chairman Ben Bernanke would open the Fed’s spigots for European banks through existing credit facilities.

Fears of a global banking meltdown were one reason the stock market fell 634 points on Monday. A realization that the crisis is not imminent helped revive the stock market, which closed Friday with a gain on the Dow Jones Industrial Average of 125.71, after rallying for 423 points on Thursday. The stock market was lower for the third consecutive week.

But can another meltdown – this time made in Europe – happen?

Anything is possible, particularly after the US banking system survived the 2008 financial crisis only after receiving hundreds of billions of dollars of loans from the US government, say economists. But they also note that the US banking system is now stronger than it was two years ago and that regulators are more vigilant.

“The Federal Reserve would assist any bank unable to get the necessary financing through the marketplace,” says Nigel Gault, chief US economist for IHS Global Insight in Lexington, Mass. “They have the ability to reactivate the emergency liquidity schemes used during the last downturn.”

At the moment, Mr. Gault and other economists say, the markets are still providing the European banks with cash for their daily needs.