By Steven K. Beckner

(MNI) – St. Louis Federal Reserve Bank President James Bullard
downplayed the global economic risks generated by the European sovereign
debt crisis and said the U.S. economy may well prove to be an “unwitting
beneficiary.”

But Bullard, a voting member of the Fed’s policymaking Federal Open
Market Committee, warned that the world may be in for a “new, more
volatile macroeconomic era.”

Bullard, in remarks prepared for delivery to the European Economics
and Financial Centre in London, said the current sovereign debt mess in
Europe is unlikely to reignite the financial crisis from which the world
is still recovering. But he said government responses to the crisis,
which moved away from previous “rules-based” policies, make for greater
uncertainty and hence heightened volatility in the future.

What’s more, he said the financial regulatory reform process now
nearing completion in the United States leaves some issues unaddressed
— a further cause of future volatility.

Bullard said the near $1 trillion Euro stabilization package
crafted by the European Commission, the European Central Bank and the
International Monetary Fund, which also includes a role for the Fed as a
provider of dollar funding via reciprocal currency swaps with the ECB
and others, has bought “substantial time” for countries to slash their
budget deficits and get their debt management under better control.

If nations fail to act quickly enough on fiscal consolidation to
rebuild their credibility in financial markets, he said the “only
alternative” will be debt restructuring. But he said that even that
would not necessarily wreck Europe’s 16-nation common currency zone.

Bullard had relatively little to say about the U.S. economy or
monetary policy, but did make a few relevant comments.

“In the U.S., the recession likely ended in the summer of 2009,
although the actual end may not be announced by the NBER dating
committee for some time,” he said. “Growth in real GDP is expected to
continue through the current quarter, making for a full year of growth
in national income.”

“If current consensus private sector forecasts are realized,
inflation-adjusted national income will surpass its 2008 peak later this
year,” said Bullard, adding that “global growth has returned as well.”

“In all, the economic situation in the US and globally is not very
different from median forecasts made at the depth of the recession in
late 2008 and early 2009,” he went on. “Since that time there have been
several moments when it may have appeared that the global economic
recovery would be derailed, but, as it turned out, the recovery has
remained on track so far.”

But now Bullard observed “a new threat to global recovery is
looming in the form of a sovereign debt crisis in Europe.”

Some of his colleagues, for example Fed Governor Daniel Tarullo,
have expressed concern that the European crisis could have significant
negative effects on the U.S. economy through financial and trade
channels. But Bullard had a different take.

“The U.S. may actually be an unwitting beneficiary of the crisis in
Europe, much as it was during the Asian currency crisis of the late
1990s,” he said. “This is because of the flight to safety effect that
pushes yields lower in the U.S.”

“Of course the U.S. also has its own fiscal problems that must be
directly addressed in a timely manner if the nation is to maintain
credibility in international financial markets,” he added.

As for the European crisis’s global effect, Bullard was less
positive, but was not unduly negative either.

“There are several reasons why this new threat to global recovery
will probably fall short of becoming a worldwide recessionary shock,” he
said.

“To begin with, this is a question of sovereign debt, and sovereign
debt crises have been with us for many, many years,” he explained.
“There is nothing intrinsic about such crises that they need to become
important shocks to the broader, global macroeconomy. Countries do
default or restructure their debt from time to time, and the world goes
on.”

“To be sure, such an outcome is stressful both for the borrowing
country and for the holders of the sovereign debt and can lead to
substantial volatility in global financial markets,” Bullard continued,
recalling the impact of the Russian default in 1998.

“Still, in most cases there is little reason to think that such
events by themselves have the power to trigger global recessions,” he
went on. “Of course, it is always possible that ‘this time will be
different’ and maybe it will be, but that would be unusual given the
historical evidence.”

-more- (1 of 2)

** Market News International **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$X$$$,M$$CR$,M$$BR$]