what they get from their government we will work tirelessly in partnership with citizen watchdogs to deliver the facts to the american people and bring genuine reform to the federal bureaucracy this is the mission of the oversight and government reform committee  now recognize myself for five minutes for an opening statement over three years ago americans witnessed domestic and global markets deteriorating resulting in millions of job losses and unprecedented measures by governments and central banks  prop up financial institutions as the united states economy remains vulnerable in the midst of a recovery just across the atlantic our friends in the european union fight to fend off a second wave of economic  financial turmoil today's hearing examines the economic unrest facing europe actions undertaken by central banks and international organizations in response the options that remain at our disposal and potential consequences to the u s economy and taxpayers during the onset of the twenty million eighty two thousand and nine financial crisis assetbacked securities chiefly mortgagebacked securities unexpectedly became illiquid and fell sharply in value resulting a housing busth now housing downturn ended up with an asset crunch that ended up in a larger housing bust financial firms were forced to write down losses that depleted their capital base and reduced their access to private liquidity in response the u s treasury federal reserve and united states congress acted well in a way that the american people are very familiar with they know this story today europe's version of this story appears to be one of which sovereign debt plays the role of assetbacked securities some say history repeats itself others say that it simply rhymes this may be the case of history repeating itself or europe's banks hold substantial amounts of european sovereign debt that has dropped in value as the debt of periphery countries has become unmanageable given the substantial amounts of sovereign debt on the books of european banks their ability to borrow has been brought into question perhaps these european sovereigns are analogous to freddie and fannie preferred that many thrifts and small banks across this country held as tier one capital the european twist to the its central banks scrambling to identify an intervention to end the panic and restore normalcy to the markets as time runs out for the eu work works to strengthen its framework in the european central central banks led by the federal reserve made it cheaper for banks to borrow dollars to ease europe's sovereign debt crisis in the program's first month there have been over fifty dollars billion in transactions prompting two immediate questions fed averted a liquidity crisis or simply postponed an insolvency crisis just yesterday imf director christine lagarde said there is no economy in the world whether lowincome countries emerging markets middleincome countries or superadvanced economies that will be immune to the crisis that we see not only unfolding but escalating director lagarde's remarks are troubling and remind us of the significance a financial meltdown has on the global economy if events in europe threaten u s banks and its economy american policymakers must know the facts of the situation and be ready to act despite differences of opinion about the fed and u s treasury actions the reality is only a handful of individuals at each institution and department truly understand u s exposure to t eurozone crisis today's oversight hearing allows the federal reserve bank of new york the board of governs of the federal reserve system and the united states treasury all of which operate as our nation's foremost decisionmakers in the areas of economics  policy to communicate to congress and to the american public about what is happening as daily headlines read of capital injections to the tune of billions and trillions of euros and dollars reenforcing the inter connectedness of the global economy it is vital that congress conduct oversight on rescue proposals and threats to our economy a simple question must be answered a very simple question such as are the actions of the federal reserve consistent with its mandate and are the firms seeking liquidity simply illiquid or perhaps insolvent i am interested to hear from this panel and from each of you about your views on this  crisis current potential rescue efforts and the consequences of the crisis on the united statesh not just to the united states but to our government not just to our government to our economy not just to our economy our citizens and taxpayers that is wh hearing is about we don't want to be caught flatfooted on what is happening in the global economy and that is why policymakers on the hill must know what potential actions you can take how you view this crisis and the actions  that you have taken with that i recognize the ranking member the gentleman from illinois mr hquigley mister quigley thank you mister chairman yesterday we heard from several nongovernmental witnesses with a shared concern of the euro debt crisis there was a general agreement that default in europe would have a devastating consequence for u s taxpayers as mr helliott testified we are exposed to nearly five dollars trillion in potential losses on loans and commitments to european governments banks and corporations at the same time yesterday's witnesses differed on the point of whether europe can resolve this crisis with its own resources today i look forward to hearing from our government witnesses who can speak to their roles in resolving this crisis we should be  calling the hearings yesterday and today on the financial crisis in europe and its potential effects on the united states at yesterday's hearing we heard that europe faces two problems one is a longterm budgetary problem that will require scaling back the other is a much more imminent threat that a major european country might default on its debt it appears that european officials are paying close attention to the longterm problem at the expense of aggravating  yesterday desmond lachman an economist and policy expert with the american enterprise institute testified as follows there is very real risk that continuing to apply substantial fiscal tightening will lead to a very deep economic recession a deep recession would make it very difficult for countries to reduce their budget deficits and would undermine their political willingness to remain within the euro in two thousand and eight when our own country faced the financial crisis the federal reserve took action to prevent an immediate financial panic by acting as a lender of last resort it did not insist that congress first agree on how to slash the federal deficit cut the federal workforce cut medicare and cut social security although the actions taken in two thousand and eight were not without controversy the immediate financial crisis had to be averted longterm measures were left for the long term unfortunately perhaps which could put our own economic recovery at risk of course our own recovery is not complete by any measure it is true that after unprecedented assistance from the american taxpayers corporate profits have returned to their highest level in years executives are making record salaries and the richest americans are continuing to see their incomes and wealth grow exponentially main street however is struggling mightily  unemployment rate continues to hover at nine percent mortgage servicers continue to foreclose on millions of american families many of them in my district and banks have yet to be accountable for the abuses that caused this crisis essential to restoring the strength of our economy specifically he called for borrowers who are underwater on their loans but continue to make their monthly payments to earn accelerated principal reduction over time he also called for more effective refinancing programs to eliminate frictions and lower costs to refinancing for all borrowers with prime conforming loans his message is directed to us in this congress and we should pay close attention to it examining the european financial crisis is a very important endeavor it is a real threat to european countries and to the united states and i commend the chairman for holding these hearings it is my hope however that our committee will also focus on efforts to help main street usa and the millions of middleclass american families and workers who were the true victims of the financial crisis we face here at home and with that  director of the division of international finance at the board of governors of the federal reserve system mr hmark sobel is the deputy assistant secretary for international monetary and financial policy at the u s department of treasury the whole truth and nothing but the truth you may be seated let the record reflect that all witnesses answered in the affirmative and with that as you well know from congressional hearings  quigley congressman cummings and members of the subcommittee it is an honor to testify before you today to discuss the economic and fiscal challenges facing europe and the potential implications for the united states let me preface these remarks by stating that the views expressed in my written and oral testimony are solely my own and do not represent the official views of the federal reserve board or any other part of the federal reserve system although the u s economy is currently expanding at a moderate significant downside risks mostly relating to the sovereign debt crisis in europe because developments in europe will have an important bearing on the prospects for growth and jobs here in the united states the federal reserve is monitoring the situation there very closely this is also why we have taken special steps in cooperation with other central banks to support the flow of credit to households and businesses i welcome the opportunity to testify on these matters today the situation in the euro area is very unsettled with pressure on sovereign debt markets and local banking systems the euro area has the capacity including the fiscal capacity to overcome its challenges however the politics are very difficult europe's leadership has a its commitment to the european union and its singlecurrency monetary union on numerous occasions and leadership is working to achieve greater policy coordination in areas such as fiscal policies assuming that europe ultimately succeed managing this situation a stronger union will emerge that will be viewed as more robust and resilient if in contrast europe were not to be fully successful in charting an effective course this could have a number of negative implications for the u s in particular there are three possibilities that i would like to highlight for the subcommittee today first if the european situation were to deteriorate then the euro area would face even more serious fiscal and economic  result growth within the eurozone would weaken and this would lead to less demand for u s goods and services that are exported to europe from companies and workers here it is important to recognize that the euro area is the world's secondlargest economy after the u s and  important trading partner for us second if the european situation were to deteriorate this could put pressure on the u s banking system the good news is that the u s banks are much more robust and resilient than they were a few years ago also the considers the exposures to the core european countries and to the overall european banking system this means that if the crisis were to broaden further and intensify this could put greater pressure on u s banks capital and liquidity buffer third if the european situation were to deteriorate further financial markets would likely become more stressed this could tighten the availability of credit to u s households and businesses and this could damage the u s recovery and result in slower economic growth and slower job creation in terms of the actions the official sector in the united states has taken or could take with regard to europe i want to emphasize that any and all such actions pursued by the federal reserve are motivated by the mandates that congress has given the federal reserve to promote price stability and maximum sustainable employment here in the united states when the federal reserve was created by congress in one thousand nine hundred and thirteen it was given the responsibility to provide liquidity to the financial system in times of stress in order to shield the economy to the extent possible from the severe effects of financial instability on economic activity and jobs while the economy and the market evolved substantially in the century since then this basic principle continues to guide our efforts today in today's globally integrated economy banks headquartered outside the united states play an important role in providing credit and other financial services in the united states providing a total of about nine hundred dollars billion in overall financing within the united states for these banks to provide u s dollar loans they have to maintain access to u s dollar funding at a time when it is already hard for american families and firms to get the credit they had need we have a strong interest in making sure that these banks can continue to be active in the u s dollar markets one way we can help to support the availability of dollar funding is by engaging in currency swaps with other central banks this has been used as a policy tool dating back to one thousand nine hundred and sixty two recently the fomc decided to use this tool cooperating with five other central banks this action is designed to support financial stability avoid an unnecessary tightening in financial conditions and support economic activity and jobs in the u s in particular by reducing the cost of dollar funding by the swap lines last month we reduced the pressure on banks in europe to abruptly liquidate their s dollar assets thus this step will help to insulate u s markets from the pressures in europe and support the availability of credit to u s households and businesses in sum i am hopeful that europe can effectively address its current challenges the federal reserve is actively and carefully assessing the situation and the potential impact on the economy we will continue to monitor the situation closely thank you for your invitation to testify today and i look forward to your questions  kamin thank you chairman mchenry ranking member quigley congressman cummings and members of the subcommittee for inviting me to talk today about the economic situation in europe and recent actions taken by the federal reserve in response to the situation the fiscal and financial strains in europe are spilling over to the united states by restraining our exports depressing confidence and adding to pressures on u s financial markets of note foreign financial institutions especially those in europe are finding it more difficult to borrow institutions make loans to u s households and firms as well as to borrowers in other countries who use those loans to purchase u s goods and services thus difficulties borrowing dollars by european institutions may make it harder for s households and firms to get loans and for u s businesses to sell their products abroad moreover these disruptions could spill over into u s money markets raising the cost of funding for u s financial institutions to address these potential risks to the united states on november thirty the federal reserve announced jointly with the european central bank and the central banks of canada japan switzerland and the united kingdom that it would revise extend and expand its swap lines with these institutions the measures were motivated by the need to ease strains in global financial markets which if left unchecked would impair the supply of credits to households and businesses in the united states and impede our economic recovery three steps were described the announcement first we reduce the pricing of the dollar swap lines from a spread of one hundred basis points over the overnight index swap rate to fifty basis points over that rate the lower cost enables foreign central banks to reduce the cost of the dollar loans they provide to financial institutions in their jurisdictions this in turn should help alleviate strains in international financial markets and put foreign institutions in a better position to maintain their supply of credit including to u s households and businesses second we extended the closing date for these lines from august one two thousand and twelve to february one two thousand and thirteen demonstrating that central banks were prepared to work together for a sustained period if needed to support global liquidity conditions third we agreed to establish swap lines in the currencies of the other participating central banks these lines would allow the federal reserve to draw foreign currencies and provide them to u s financial institutions on  secured basis u s financial institutions are not experiencing any foreign currency liquidity pressures at present but we judged it prudent to make such arrangements should the need arise in the future i would like to emphasize that information on the swap lines is fully disclosed on the web sites of the federal reserve board and the federal reserve bank of new york i also want to underscore that the swap transactions are safe and secure first the swap transactions present no exchange rate or interest rate risk because the terms of each drawing and repayment are set the time the draw is initiated second each drawing on the swap line must be approved by the fed allowing us to closely monitor use of this facility third the foreign currency held by the fed during the term of the swap provides an important safeguard fourth our counterparties are the foreign central banks not the private institutions to which the central banks lend the fed's history of close interaction with these central banks provides a track record justifying a high degree of trust and cooperation finally the short tenor of the swaps means that positions could be wound down relatively fed operations to conclude the changes we have made to our swap line arrangements should help maintain the flow of credit to u s households and businesses while protecting the u s taxpayer ultimately however the easing  financial strains here and abroad will require concerted action by the european authorities we are closely monitoring the events in europe and the spillovers to the u s economy and financial system thank you again for inviting me to appear before you today discuss interests in european economic reform over the past year stresses in europe have spread to some of europe's largest economies the crisis now facing europe is deeper and more entrenched euro area growth is projected by most pace of recovery has strengthened but given strong global linkages europe's problems are a serious risk for us the eu buys nearly twenty percent of u s goods exports when european growth slows s jobs and exports decline when european financial markets tighten u s banks may be less willing to lend hurting american businesses that rely on bank credit to grow when european stocks decline s equity markets often do as well hitting the savings the k programs and wealth of americans in states such as new york north carolina and illinois over one hundred and fifty thousand jobs and over two hundred and thousand in illinois are exportrelated europe has an enormous selfinterest in tackling its problems as president obama and secretary geithner have stated europe clearly has the capacity and resources to address it crisis europe is making progress in putting in place reforms to create the conditions for future growth and build a stronger architecture for fiscal union the recent european council agreement represents an important step forward but more work remains to be done supporting europe is a matter of vital national interest for the wellbeing of the american economy therefore we are heavily engaged with europe bilaterally the president is actively engaged there are extensive contacts with european leaders secretary geithner has traveled to the europe three times in the last three months multilaterally we are working through the g last month in c g leaders focused heavily on the european crisis mexico is going to chair the g in two thousand and twelve and promoting a more effective european crisis response is a top priority of the mexican chair supported central and eastern european transition in the early s and later that decade and earlier in the last decade responded to asian and emergingmarket crises it has been a hallmark of my career to see the strong bipartisan support in both the executive and legislative branches for the fund's role in the global economy countries first and foremost bear the burden of adjustment but the imf can play a role in promoting more orderly adjustment by offering financing to support economic reforms thus providing breathing space to countries in overcoming their problems with less disruption when growth plummets in one country especially a large country it spills over on to others in these circumstances imf support helps mitigate the impact on the system as a whole the global financial crisis in two thousand and nine offers a good example the actions taken by national authorities coupled with the london summit announcement of significant new imf support helped stem a massive destabilizing capital outflow from emerging conditions to help assure it is repaid its repayment record is outstanding when the imf draws on u s resources we are exposed to the fund's balance sheet and that balance sheet is solid the fund is regarded as the world's preferred creditor meaning that all imf members agree it gets repaid first challenge europe faces is within the capacity of stronger european members to manage as european countries strengthen economic reforms and fiscal governance europe must also continue mobilizing the requisite resources to put in place a strong and credible firewall commensurate with the scale of the challenge it must do so quickly with force and determination the imf cannot substitute for a strong and credible european firewall in response the imf now has a substantial arsenal of financial resources almost four hundred dollars billion the administration has been clear with our international partners that we have no intention of seeking additional funding for the imf thank you for inviting me again today i look forward now the reason why we are having this discussion is because in the last crisis policymakers on the hill were largely caught flatfooted on the actions of the federal reserve and the extraordinary actions of the request tarp the american people were surprised by it too looking at this crisis with europe i think it is important that we have oversight hearings on the hill to understand the range of options that you have  both with our central bank and the central bank's really main market bank being represented here today or main market participant to understand the range of options so let's begin with this question problem of getting seventeen countries that share the euro and twenty seven countries that are part of the european union to have a meeting of minds to move toward greater fiscal integration we are seeing movement in that direction but it is not so if i could add on to those remarks with which i fully agree essentially on top of a number of different challenges that europe faces it faces a critical problem of confidenceh confidence by global investors in the longterm sustainability of fiscal finances in some european countries although as president dudley has mentioned if you look at europe as a whole its fiscal numbers in terms of debt do not seem out of line confidence in the nearterm liquidity situation of european countries investors want the confidence they know that countries will be able and you know before the long term is reached to secure their necessar was released last friday they you know suggested measures to bolster longterm fiscal discipline they also released additional measures to address the viability of the financial backstop you know for euro area countries and then finally somewhat previous to that they announced higher capital requirements for banks so they are taking measures but a lot more followthrough is needed on them details need to be fleshed out but again the europeans have a deep commitment to address the issue and they should have the resources to be able to do  generalize across you know all the different banks in europe i think there are some banks that are in greater degrees of difficulty than others the good news i think is that the european authorities are doing the same kind of stress test that we ran here in the united states and they are i ying the capital needs that their banks have and are basically demanding that their banks raise their capital ratios over the next six months or so so i think that is a very important step to restore confidence in the european banking system now that is not sufficient they also have to have confidence in the fiscal sustainability of each country's debt burdens because the banks hold a lot of sovereign debt so you really have to solve two problems you have to basically make sure the banks have enough capital to sort of handle normal stress environments but you also have to get each country on a sustainable fiscal path so that people are comfortable that the sovereign debt they hold is going to be money good in the end just to add briefly to those remarks all of which again i agree with in general whenever you have a liquidity problem either for sovereign governments or for banks it is because at least some subset of investors have doubts about the solv well even if perhaps a broader class of investors is more confident so that is why it is critical in this situation where liquidity is at issue to bolster confidence and sustainability and longterm solvency and that is why it is critical that the europeans move ahead on various fronts both fiscal discipline financial backstop and both increasing the transparency of bank situations as well as ensuring that they have sufficient capital probability that the institution is insolvent they are often likely to pull back in terms of their funding so the liquidity problem comes about not because the institution is definitively insolvent but just that there is some risk of insolve might break off and that in the end it could be better for those countries and the situation as a whole for them to do that do you agree as a panel mister dudley i don't have an opinion onh i don't the positive part of the story the negative part of the story which is very negative is the fact that it would be very difficult for you to honor all your obligations that you have in terms of euro liabilities and so it would be hugely devastating for any country that left the euro in terms of how their financial system was actually able to perform going forward the euro system does not contemplate any country exiting there is no mechanism to do so so you know we can speculate about what w eurozone is a longterm project of political unification and economic unification you know that dates from world war ii and this is a project that the european authorities still take extremely seriously and are very committed to contemplating breaking away that would give it some more latitude in terms of its exchange rate adjustment but each of these countries is very tightly linked into the financial system of the rest of the euro area you know both in very considerable disruption thank you building on mr hkamin's remarks i wanted to underscore his point about the commitment in europe to the euro and following europe has made progress considerable progress in this regard the countries of europe are undertaking over the last period they have created the european financial stability fund and now the european stability mechanism putting substantial resources at stake for me i think if you thought back two years ago you would have said that these reforms were unimaginable that europe would have undertaken them and yet europe has responded fairly forcefully and i just want to underscore that i  hdudley very quickly you talked about the loans that we have to countries like greece ireland portugal and spain being relatively small exposure i believe the center for american progress that number at about one hundred and thirteen dollars billion but you did say that to the eurozone as a whole it is a much larger exposure i mean what figure becomes significant in your mind i mean and what but your point is well taken that as you broaden the exposures out to europe as a whole they become very very large and what that means is that if the european system were to get into difficulty there clearly would be consequences for us here in the as i mentioned in my opening statement you gave a speech at the united states military academy at west point during which you indicated that our economy continues to face significant downside risks mostly related identified a number of measures that might comprise a comprehensive approach to housing policy including the elimination of barriers to refinancing and measures that will enable borrowers who are underwater on their loans but continue to make their monthly payments to earn accelerated principal reduction over time further you stated and i quote i am encouraged by the recent decision by the fhfa to make it easier for certain borrowers with high loantovalue ratios to refinance you went on to say i hope this initial step will be followed by others that collectively move in the direction of stabilizing house prices i believe this would not just  i completely agree with your policy prescriptions however when fhfa acting director demarco appeared before our committee he testified that he has concluded that the use of principal reduction within the context of a loan modification is not going to be the leastcost approach for the taxpayer we have asked mr hdemarco to provide the details of this analysis but he has not yet provided us with that information these are my questions given that as you said in your statement taxpayers effectively own credit risks of loans guaranteed by the gses do you believe that enablin borrowers with loans owned or guaranteed by the gses who are underwater to earn principal reduction would be in the longterm interest of the taxpayers that is number one i want to ask my questions because i want to nine hundred thousand additional borrowers is a program that helps nine hundred thousand borrowers adequate to contribute to a stabilization of house prices or do you believe that significantly greater numbers of monetary policies implemented by the federal reserve and what are the consequences for our economy mister dudley thank you congressman cummings let me take your last question first how are the problems in the housing sector undermining the effectiveness of monetary policy it is undermining the effectiveness of the monetary policy because the decline in longterm rates is not being fully taken advantage of by households in terms of their ability to refinance their mortgages so people have mortgages th housing it has truly two sort of benefits one if you could stabilize housing pricesh if you took these steps i think you could stabilize housing prices and if you stabilize housing prices i think you would actually start to see more demand for housing and if you saw more demand for housing then housing prices would start to go up and that would actually bolster household confidence because houses are a very large component of the household balance sheet so if home prices are stable or rising people are going to feel a little bit better about the outlook not just for housing but also about their own homebuyers that have mortgages that are underwater to incent them to continue to pay on those mortgages by giving them some program of principal reduction now obviously the devil is in the details so you have to have a good program design but we are confident that  one can design a program which would be net positive to the taxpayer in terms of the harp program that you talked about the nine hundred thousand you know obviously you know every bit helps obviously i would like to see the program well thank you for the kind words congresswoman maloney obviously if europe went into a deep recession there would be significant consequences to the united states the first consequence would be in terms of our ability to sell goods and services to europe  would have trouble exporting to europe and that would have consequences for employment and manufacturing here in the united states the second transmission channel would be back to our u s banking system as we have discussed earlier u s bank do have a large exposure to europe and so if the european economy is doing very poorly as you suggest clearly that would put stress on u s banks capital and liquidity and so that could have implications for credit availability here in the united states and third if europe were to go into a deep recession this would also be i think quite challenging for financial markets for the u s equity market and for other financial markets and so that also would so in reference to that and as i said earlier the european authorities are deeply committed to their project of political and economic unification to properly combat the crisis many economists say they have enough resources to combat it themselves do you think they need a tarplike approach if they won't combat their own political problem should we come in and handle is certainly not for us to handle their problems for them and they are very cognizant of their problems and they have announced a number of steps in the past week and then in the past few months is fully committed to the european union and they are going to take the steps that they need to move toward greater fiscal integration as i said earlier it is a political problem and so maybe they are not moving as fast as some of us might like but they are moving i think in the  direction the second thing i would just stress is you know all the things that the federal reserve has done with respect to the foreign exchange swaps this isn't about helping europe this is about helping ourselves this is about ensuring the flow of credit to u s households and businesses we are doing this for specific question following up with  let's say greece withdraws from the euro do you have the scenariosh is that part of the scenarios that you worked through and would that haveh you know so walk through federal reserve system can handle very stressful environments and ensure that the u s banking system can handle very stressful environments regardless of the source of that stress so for example the u s right now we are in the processh the federal reserve is right now in the process of putting the u s banks through a very severe stress test and that exercise which you knowh and that stress might come from europe but it could come from some other source so i think our job is to make sure that the u s banks can withstand a bad economic e happening with this euro crisis over the next six months to a year  europe is developing its firewall to provide time and space while the countries are putting in place reforms and as these take hold and we could they expect to see give us the range here mister kamin a great deal depends on how european authorities follow through on the commitments that they have already stated they have a very full agenda eurozoneh to work out to agree on a system of financial disciplines to consider a bilateral loan by the europe to the imf in order to facilitate their lending in order to move up the  that is history so let's go throughh mister kamin those are the items that are on the europeans agenda and so what we look forward to over the next weeks and months is their implementationh their agreement on those items which will in some cases ratification by the member states and their implementation of those and that is the process that we are looking forward and if they move through decisively on that and put these measures in place there is some chance perhaps a good chanceh it is hard to knowh that eventually that will build the confidence needed and we will see the crisis easing if they do not succeed in the near term in achieving that type of progress and followthrough and that disheartens markets and investors the details so we have a broad outline of the way forward but now we have to actually see the details of how they are going to implement it and then we have to see the political process support it and that is really you know going to be critical over the next three to six months problems in europe become much more manageable because why investors are worried about european banks is in large part because they are worried about the sovereign debt holdings those banks have so if the european countries put authorities must meet at the same time there is a parallel process that will go on for the european banks as they strive to meet their heightened capital requirements and there are some risks there that have been much talked about in the media about how they will achieve crisis and stabilizing the american economy why was it important for the central bank of the united states to intervene during the financial crisis mister dudley well i think during the financial crisis what we saw was a complete loss of confidence in privatesector financial firms to engage with one another and so it was very very important for the federal reserve to provide a backstop form of funding so that people were more willing to actually come back into the market and start to united states had and has a longterm fiscal problem but that did not prevent the fed from taking action to address the immediate financial crisis at hand but the european central bank is not doing that in europe that continuing to supply substantial fiscal tightening will lead to a very deep economic recession a deep recession would make it very difficult for countries to reduce their budget deficits and would undermine their bank is their ability to buy primary debt issuance from the sovereign countries and this is prohibited by treaty it is prohibited by treaty for the ecb to buy the sovereign debt issued by the countries in the primary market and some people are arguing that they should sort of do it anyway but you know mario draghi who is the head of the ecb points i think correctly to the treaty which prohibited such activity but i think in terms of backstopping their banks they are actually providing  monetary policy in response to financial and economic strains additionally while they are indeed as president dudley has said prohibited from buying sovereign bonds directly in the primary market  from governments they are not prohibited from buying bonds in the secondary marketh in other words buying them from other holders of this debt and in fact they have been doing so for some time so they are very much committed to indeed acting as a lender of last resort for banks and for supporting the european economy in the ways that they view is within their purview but a lot of the heavy lifting will have to be done by governments and fiscal authorities you know in order to fully address the strains on policy by other central banks so even if i agreed with everything my colleagues have said i would only say that the ecb has played an important role in ensuring european financial stability and we look forward to it continuing to do mister chairman thank you and i want to thank you for your leadership on this issue which frankly is unparalleled and while i had a series of questions including whether or not the breakup of the euro could result in a net devaluation what would happen with greece with our panel of experts yesterday is that you know greece would basically with an ongoing process with other euro challenges based on the existing policy if those policies aren't quite working with portugal greece and ireland what makes you believe that they would work with spain and italy mister dudley mist not sure that they aren't working i think that it is too soon to say exactly whether these countries are going to be able to sustain the fiscal adjustment that they have put in place and i think the outlook is different for different countries the second thing i would say is that the swaps really have nothing to do with whether greece leaves the euro or not the swaps were put in place for a very different reason we were seeing that european banks were having difficulty obtaining dollar funding and as a consequence of that they were liquidating their dollar book of assets here in the united states so this was tightening credit availability in the united states which was going to have a direct impact if it was allowed to continue on u s households and businesses so the swaps were really about the ability of european banks to obtain dollar funding and the consequences of that on the united states whether greece leaves the euro or doesn't leave the euro i think that was immaterial to our decisionmaking on  policies were put in place mister dudley i would say two things as you go from the peripheral countries to the core the debt challenges become much more manageable in other words if you look at spain or you look at italy and you look at their debtto do is completely achievable it is completely achievable the question is just the political will to implement the fiscal austerity on a reasonable timeframe and convince market participants that they can actually do so you know one of the problems we have right now is that it is going to take time for countries to implement their programs and therefore it is going to take time for market participants to be convinced that they actually are on a sustainable path and so the question is how do you get from here to then when they have actually had a chance to implement their programs  liquidity both to u s financial markets and financial markets around the world so many european banks you know rely heavily on lending and investing by u s money market funds in these bank cds commercial paper and the like and that is an important source of the dollar funding they use in order to provide lending to firms and businesses both in the united states and abroad by the same token the most vulnerable socalled peripheral european economies so that is no longer much of a source of risk but that said they still have very substantial exposures to the banks of core european economies so in the event thath so that poses a number of risks first in the event that the financial strains in europe were to intensify money market funds will naturally be expected to further reduce you know their exposure to those banks which would increase their financial straits and as wellh and this is a problem that has received much attentionh you know u s investors in money market funds you know might be inclined to take some of their funds out that could put the money market funds in a difficult situation  regulatory agencies are interested in this and of course the sec has the primary regulatory authority you know for these money market funds and they are working through some reforms so the swap line is about direct american exposure in that regard mister kamin the swap line is about exposure in that regard and many regards its point is to make sure you know that to help european and other foreign institutions get the dollar funding that they need in order to continue providing credit both around the world and to u s households and firms and by doing that we strengthen the liquidity position of these well let me address the question of what is the single most important thing europe can do and i think that it is clear that europe needs to pursue a comprehensive strategy to overcome the crisis this is going toh and what i think needs to be done in a nutshell is the countries have to reform they have to stick to their reform plans and it is going to be about implementation it is not going to be easy but that is a first prerequisite for restoring confidence secondly at the european level there needs to be further progress in strengthening the foundations of the  to get from here to there and i think this is where the issue of the european firewall comes into place it is a firewall that has to be strong and credible and it needs to be there as a backstop to ensure that countries have access to affordable financing at sustainable rates and it important that banks in europe have adequate capital and access to affordable funding  that represents part okay of the agreement that was concluded about a month and a half ago by european authorities that they would raise the capital standards for banks in europe and if those were not met then governments might time to show that you can get there and you need the countries to do what they have to do in terms of demonstrating that they are committed to getting their fiscal houses in order on a sustainable longterm basis and lastly some of these countries also need to take steps to improve their competitiveness in other words they have to do structural reforms to their labor markets et cetera to improve their competitiveness because it is not just a fiscal problem it is also a competitiveness problem for some of these countries misess maloney well i would like to comment on a strategy that came out of the in my testimony i indicated that the imf funding plays a very vital role in the system in helping countries when countries face stresses and difficulties they frequently come to the imf against the background of a loss of access to financing which imposes very deep stress on the society growth and vitality they do so first by developing economic conditions money is tightly overseen there are quarterly  performance criteria on fiscal and various other indicators to make sure that the country is moving on a track that will restore it to stability in addition the fund provides financing and that country has problems especially a large one it has ramifications for the neighbors it can have ramifications for the global economy as we saw in two thousand and nine and so the logic imf assistance is not only to help the country restore stability but it is also to lessen the impact on the global economy which is very much in our interest and as we indicated earlier  the vantage point of the united states one of the problems from a deteriorating situation in europe is that this hurts u s exports it hurts u s growth it constrains financing to businesses it we have said very many times that europe has the primary responsibility for addressing its problems it has the capacity and resources to address its problems we have welcomed the fiscal actions they have taken we have welcomed the actions they have taken to put in place a stronger governance framework and we have welcomed the creation of the firewall we have been very clear that the imf cannot substitute for a strong and credible european firewall and a strong and decisive and forceful european response to the crisis misess maloney what would happen if the republican interest in sustaining global financial stability which is important to the health of our economy so again europe has to act but the imf can be a tool for helping achieve a sounder world economy and we want the imf to have the resources to be able to do its job and perform  in two thousand and nine congress approved a one hundred dollars billion increase in our commitment to the new arrangements to borrow as well as a modest eight dollars billion increase in our quota and two which is when the swap lines were created as bill was mentioning earlier so this is vital to promoting global stability so my view is that if we were to withdraw our  funding i think it would harm market confidence i think it would weaken u s leadership in the institutions i think it would put our standing in the fund in jeopardy and i think it would thank you the imf in my perspective is a very unique institution so let me just cite three factors one as i was just describing it can set the macroeconomic conditions for a loan to a country that helps the country get back to growth but it also can help ensure that the country gets back growth through this quarterly monitoring process and that helps ensure that the fund's resources are safeguarded secondly the fund is a preferred creditor  so everybody in the world all countries all members of the fund recognize that the fund is first in line to be repaid and its repayment record is just excellent thirdly it has a strong balance sheet a very strong balance sheet has good reserves and again it has this ability to set these conditions it has this abilityh it has preferred creditor status and is not only good for the members of the fund but another dimension of this is that when the imf draws on our resources and provides it to another country some people think you guinta the reason i ask is i believe it was today's washington post article and i don't know if you have seen it yet but it was entitled will u s taxpayers be on the hook for bailing out europe there was a quote from anthony sanders who is a professor at george so i am curious about two things number one why all of a sudden there would be this shift in an expectation of it not to be paid back number one number two the statements that have been made geithner followed up by the president of the united states suggesting that no additional funds should go to the imf i am particularly curious to know if that line of credit should be withdrawn in your opinion signed into law shortly thereafter was a vital step the announcement of the nab was instrumental in contributing to strengthening global stability have the resources to do its job the nab is part of that and we strongly back that i again a professor sanders made that statement yesterday in testimony so it is something that i would probably want to follow up with you on the final question i do have is in the cases of greece and ireland and portugal their debttogdp ratio after receiving assistance packages i believe actually increased or rose so while i understand your point about the impact globally that imf has it doesn't seem that countries get the point that after they receive a loan or a bailout they are not fixing their debttogdp ratio which is quite frankly the same problem we are having here in the united states in my increasing not decreasing mister sobel congressman i look forward to working with you after this hearing so when growth has slowed in these economies that has had basically this tends to push deficits up in the short term meanwhile these countries are taking actions to bring their fiscal houses in order against the background of the cyclical  downturn in the fiscal position the point i made is that the imf support provides a more orderly transition to  chairman so what you are sayingh i understand what you are saying you are saying that the debt in the short term is going up but these countries are taking longerterm measures to stabilize their economy to improve their economy have a progrowth economy  reduce expenditures can you tell me then in your opinion if that is what we think should be a standard for us to be loaning money to the imf are we in fact as a nation imposing that same standard on ourselves is the president of the united states imposing that same standard on our country i thank my colleague and for the committee's information we actually requested originally mister sobel's superior at treasury who perhaps could have answered that question in particular more further financial markets would likely become more stressed and you go through the scenarios for the american economy then you sayh and this is bold language for the federal reserveh at a time that u s unemployment is very very high this is a particularly unacceptable outcome in the extreme u s financial markets would become impaired and you go forward there strong language for the federal reserve so in the event of that scenario that the european situation were to deteriorate further what is the fed prepared to do to prevent this outcome mister dudley well i think my language was really more about how unacceptable the high unemployment rate is and how if the unemployment rate were to to your interpretation just in the interest of time i think that you know the federal reserve is doing what we think is appropriate to support lending here in the united states and that is why we have engaged with these foreign exchange swaps with  the five other central banks i don't think we contemplate any other actions at this time to do anything else in terms of providing assistance to europe it is really their problem to solve from the federal reserve perspective the ecb has liquidity facilities in place in terms of euro currency they now have swap lines that we think are very sufficient to provide dollar liquidity so i don't anticipate even if the dudley bar to doing that would be extraordinarily high i cannot imagine the circumstances in which we would think that was an appropriate action from a monetary policy perspective we have the legal authority to buy foreign sovereign debt but this is know we need to be secured to our satisfaction and we do take a lot of care in our discount window lending and our other lending to make sure that the collateral that we give is appropriately haircutted and the federal reserve is wellprotected that is one reason why even despite the questions this morning this hearing was about proper oversight from congress of what our political branch at treasury is doing and to address what is happening in europe what we see on the front pages and what raises great concern across this country and around the world we also want to see what the range of options are from our central bank and we  realized with this hearing that there are an enormous number of questions about this but we do see that our central bank both with new york fed represented here today and the board of governors have i think that was very clear from today what was disappointing is to not see that same level of planning from the treasury and i think that would be additional questions that we would have here on the hill as to what the treasury would consider going forward and we hope to have additional oversight to make sure that we have that disclosed to the public so we thank you so much for your testimony thank you for your willingness to engage in these