Eurozone bank failures could cause U.S. credit squeeze: Kaufman

Sun Dec 18, 2011 12:39pm EST
 
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By Ellen Freilich

(Reuters) - Euro-zone bank failures could lead to a credit squeeze in the United States, hurting an already subpar U.S. economic recovery, warned the well-known Wall Street economist Henry Kaufman.

A deterioration in the European financial system "could cause some of the American financial institutions to become more conservative and limit their own balance sheet expansion, a credit squeeze that would place a limit on the American economy," Kaufman said in an interview with Reuters.

"A failure in the euro-zone area, a malfunctioning of the euro, would have negative repercussions for the U.S. not just in terms of a slowdown in U.S. exports to Europe, but also because of linkage between American financial institutions and European institutions," said Kaufman, who is president of the economic and financial consulting firm bearing his name.

Kaufman earned the sobriquet Dr. Doom in the 1970s - long before Nouriel Roubini acquired the title in recent years. Like Roubini, Kaufman was prescient in his warnings about excessive debt in the financial system.

These days, with markets focused on Europe's excessive debt, he says severe spending cuts in southern Europe could send those countries into a downward spiral with no prospect of recovery.

"Debtor countries need to expand their economies and austerity measures diminish those countries' ability to grow and service their debt," Kaufman said.

Before establishing his eponymous firm in 1988, Kaufman spent 26 years at Salomon Brothers Inc. His prediction on August 17, 1982, that interest rates would fall sparked a stock market rally that helped kick off the 1980s bull market.

This year, the stock market has been held back by worries about Europe, where rising borrowing costs signify concerns that the debt contagion that has hit smaller nations will engulf large nations and large banks. The fear is exposure to European banks will hurt U.S. banks as well.   Continued...