Cantillon: Files reveal Fed’s 2010 fears over EU crisis

Newly released transcripts from key Federal Reserve meetings in 2010 provide a vivid glimpse into its ruminations as the euro zone descended into full-blown crisis. There are many hundreds of pages, but one is point is clear. US central bankers viewed the increasingly chaotic situation in Europe – and the potential for contagion beyond the borders of the single currency – with acute anxiety.

With major problems in Greece increasingly apparent in early 2010, the records show that US bank supervisors moved in February that year to seek information from the largest American lenders about significant credit exposures to peripheral Europe. The Fed Open Market Committee – the key policy-making body of the US central bank – was later briefed that US banks had $24 billion in exposures in Greece to Portugal but another $208 billion to Spain, Ireland and Italy.

Whenever one problem was tackled, another blew up. The first Greek bailout loan prompted concern that Ireland and Portugal would require aid. When Ireland succumbed in November 2010, Fed officials were quick to conclude Portugal would follow, which it did. “Judgments regarding debt sustainability are notoriously difficult: Greece’s debt burden is clearly unsustainable, but such assessments for Ireland and Portugal are much murkier,” said Fed economist Nathan Sheets at the December 2010 meeting.

Mr Sheets then relayed concern about big US exposures to both peripheral and core European borrowers, if the crisis spread.

“Should Spain come under attack, the crisis might potentially snowball into a broader run on sovereign debt that could affect Italy, Belgium, the United Kingdom, and perhaps other countries as well. With this warm thought in mind, I would ask all of you include in your letters to Santa a request for a quiet and crisis-free holiday season.”

There is more, including the revelation of a “personal appeal” to then Fed chair Ben Bernanke from then European Central Bank chief Jean-Claude Trichet to reopen currency swap lines. When the going really gets tough, it gets personal.