US Federal Reserve governor Daniel Tarullo tonight said Europe's debt crisis may pose a threat to the US and world economies as trade shrinks and banks incur losses on European investments.
"A deeper contraction in Europe associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for US trade and economic growth," Mr Tarullo said in testimony today to Washington’s financial services subcommittees.
The euro and global stocks fell again today as concerns over how Europe's debt crisis will affect world economic growth continued. Fears that other euro zone countries will follow Germany's move to ban short selling in some stocks and bonds pushed European shares sharply lower.
"There is a rumour of the short selling ban being extended in the euro zone," a trader said.
However, French economy minister Christine Lagarde confirmed earlier that France would not be following a German move to ban the naked short-selling of sovereign debt.
MSCI's All-Country World index was down 2.7 per cent while its more volatile emerging markets component was down 3.1 per cent.
The FTSEurofirst 300 index of top European shares was down 1.02 per cent, but energy stocks were boosted by crude oil touching $70 a barrel before dipping back to $68.86.
In the US, Dow Jones industrial average dropped 262.70 points, or 2.52 per cent, to 10,181.67. US stocks are now down 10 per cent from this year's high.
After sliding 129 points or 4.1 per cent yesterday, the Dublin market was again in negative territory, trading 105.53 points down at 2,873.41.
Earlier, in Japan, the Nikkei closed down 1.54 per cent, a new three-month low.
The euro remained vulnerable, slipping back 0.76 per cent to $1.233 in volatile trading, after hitting a four-year low against the dollar yesterday.
Investors were said to be concerned that European governments remained divided on how to contain financial turmoil in the wake of the sovereign-debt crisis.
Mr Tarullo, by outlining the potential risks to the US economy posed by the crisis, made the case for the Fed's decision on May 9th to restart emergency swap agreements with the central banks in Europe, Canada and Japan.
The swap arrangements were criticised in today's hearing by Texan representative Ron Paul, a Fed critic who has called for abolition of the US central bank.
The swap lines "will likely result in the creation of tens of hundreds of billions of dollars of new money," said Mr Paul, the senior Republican on the subcommittee of Domestic Monetary Policy.
"Bailouts never work. They never have and they never will. The only thing they do is burden the taxpayer and delay the inevitable collapse of the bailed-out entity."
Mr Tarullo said $1.2 billion in swaps will be outstanding as of the end of the day. The ECB has about $1 billion in 84-day funds and the Bank of Japan accepted $210 million in dollar bids this week.
Reuters/Bloomberg