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Obama Tries to Inoculate the U.S. Against Contagion from Euroland

But will his efforts be successful?

12:00 AM, May 22, 2010 • By IRWIN M. STELZER
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Then there is the non-trivial matter of America’s banks, which have important relationships with their European counterparts, and an even greater exposure to European bank debt than to the IOUs of Greece and other troubled countries. The Wall Street Journal estimates that the exposure to French, German, and banks in smaller euroland countries comes to over 80 percent of the funds set aside to absorb losses by our five big banks -- J.P. Morgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. Count only troubled Ireland, Spain, and Italy and the figure is still a hefty 25 percent of the rainy-day funds. American banks worry that a series of defaults in Europe will hit the balance sheets of European banks, making them unreliable counterparties. That would make interbank lending more costly and perhaps even bring it to a grinding halt. You don’t have to have a deep understanding of the details of bank finance to understand what would happen, only a memory of what happened during the last bout of interbank nervousness following the collapse of Lehman Brothers in September 2008.

There is some good news for the president, and for America in all of this. In crises, there is a flight to safety, which means the dollar. For the first time since September, the Chinese have stopped selling and are once again net buyers of U.S. bonds. Other investors are giving up Europe for America. That means low interest rates here, which just might offset the negative impact of a devalued euro and a pegged yuan. Obama certainly hopes so.   

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