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[Senate Hearing 112-479]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 112-479

        EXAMINING THE EUROPEAN DEBT CRISIS AND ITS IMPLICATIONS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

        EXAMINING THE EUROPEAN DEBT CRISIS AND ITS IMPLICATIONS

                               __________

                           FEBRUARY 16, 2012

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel

                     Laura Swanson, Policy Director

                   Glen Sears, Senior Policy Advisor

                 Andrew Olmem, Republican Chief Counsel

            Dana Wade, Republican Professional Staff Member

                Mike Piwowar, Republican Chief Economist

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                      THURSDAY, FEBRUARY 16, 2012

                                                                   Page

Opening statement of Chairman Johnson............................     1
    Prepared statement...........................................    25

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2

                               WITNESSES

Lael Brainard, Under Secretary for International Affairs, 
  Department of the Treasury.....................................     3
    Prepared statement...........................................    25
Robert D. Hormats, Under Secretary for Economic Growth, Energy, 
  and the Environment, Department of State.......................     5
    Prepared statement...........................................    28
    Responses to written questions of:
        Senator Wicker...........................................    36
Steven B. Kamin, Director of the Division of International 
  Finance, Board of Governors of the Federal Reserve System......     7
    Prepared statement...........................................    33

                                 (iii)

 
        EXAMINING THE EUROPEAN DEBT CRISIS AND ITS IMPLICATIONS

                              ----------                              

                      THURSDAY, FEBRUARY 16, 2012

                                       U.S. Senate,
           Committee on Banking, Housing, and Urban Affairs
                                                    Washington, DC.
    The Committee met at 10:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order. Today we 
will discuss an important and timely issue, the European debt 
crisis. As we speak, events are unfolding that will determine 
the future of Greece, its neighbors and the European Monetary 
Union.
    As our largest trading partner and a vital strategic 
partner, events within the European Union also impact on the 
U.S. While I hope that the situation in Greece can be resolved 
in an orderly fashion, many nations across Europe, including 
Greece, will continue to face difficult and unique economic 
conditions and will have to make tough decisions.
    Today, we will hear from the Treasury Department, the State 
Department and the Federal Reserve. Keeping the momentum going 
in our economic recovery is important to me and my 
constituents. I ask that these three agencies continue to 
monitor the situation in Europe closely to ensure any potential 
spillover effects in the U.S. are minimized.
    I look forward to hearing an update on the situation in 
Greece, the impact of a possible agreement in Greece's fiscal 
situation and Greece's future in the euro zone. Second, in some 
European countries, we have seen resistance and upheaval in 
reaction to the debt crisis that could present obstacles for 
recovery. I would like your analysis of how the debt crisis is 
impacting the broader political situation in Europe.
    Third, I would like to learn more about efforts to 
recapitalize European banks, the exposure the U.S. financial 
system may have to the ongoing turmoil in Europe and the 
strength of our banks to withstand any potential external 
shocks. Last, the IMF will continue to play a role in helping 
to find a solution for what's happening in Europe. I would 
appreciate your evaluation of the IMF's role in dealing with 
the debt crisis in Europe and how the U.S. has interacted with 
the Fund.
    This hearing is an important part of this Committee's 
continued oversight efforts. Because of the Wall Street Reform 
Act and other actions by the U.S. financial regulators, I 
believe that we are better equipped today to deal with any 
potential fallout from the euro zone's debt issues.
    I thank our witnesses for being here today and appreciate 
the updates you can provide us on the situation in Europe.
    Senator Shelby, your opening statement.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you. Thank you, Mr. Chairman. I 
welcome our witnesses today.
    During the past year, the European Union has been 
embroiled, as we all know, in a fiscal crisis brought on by 
years of reckless Government and budget deficits and sluggish 
economic growth. The focus of the crisis has been on the 
relatively small economy of Greece, but the European Union 
Governments fear that it could quickly spread across the 
continent.
    Other European countries are particularly vulnerable 
because of their own strained balance sheets. Portugal's debt 
to GDP is expected to exceed 111 percent this year. Italy's 
debt to GDP is about 120 percent. Meanwhile, economic growth in 
the euro zone has averaged between 1 and 2 percent for the last 
10 years.
    To contain the crisis, European leaders have taken a series 
of unprecedented actions. Most of these actions have required 
substantial backing by European taxpayers. EU leaders 
established the European Financial Stability Facility, which 
can borrow more than $500 billion from member States to loan 
money to countries at risk.
    The IMF has also provided numerous loans to European 
countries. It recently bolstered a special lending facility 
with a capacity to lend another 500 billion. But because the 
U.S. is the single largest contributor to the IMF, this means 
that the U.S. taxpayers are probably on the hook for bailing 
out Europe.
    In addition, the European Central Bank has stepped in with 
emergency interventions. The European Central Bank has 
purchased about 300 billion in risky sovereign debt and has 
provided more than 600 billion in 3-year liquidity to euro zone 
banks. But it looks like the bailouts and the backstops will 
not end there. European and IMF leaders have said there's a 
need for even more firewalls backed by hundreds of billions of 
dollars.
    Despite all of these extraordinary actions, there remains a 
great deal of uncertainty about whether the EU has done enough 
to weather the crisis. I hope our witnesses today can provide 
an assessment of the crisis in how it is likely to play out 
over the next several months. Do they believe that Europe's 
response has been adequate, for example? Are there specific 
actions that they recommend be taken to stop the crisis from 
spreading? And given the global nature of finance, I think we 
should be under no illusions that our economy is somehow immune 
from the effects of the European crisis.
    I hope that our witnesses will provide their assessments on 
how serious a threat the EU, the European Union, crisis is or 
could be to the U.S. economy. More importantly, I would like to 
know what they have done to protect U.S. financial systems.
    If the crisis in Europe does spread to the U.S., are the 
financial regulators prepared and able to minimize its effect? 
In particular, what has the Federal Reserve done to ensure, for 
example, that the U.S. banks have in place appropriate 
safeguards?
    One of the lessons from the 2008 financial crisis was that 
regulators and policy makers need to take decisive and 
proactive steps to prevent manageable financial problems from 
growing into uncontrollable systematic shocks. Not only were 
the Federal regulators here too slow to react to the 2008 
crisis, they were in some respects, coconspirators. I hope they 
will not be caught off guard again.
    The fiscal crisis in Europe should also be a cautionary 
tale for this country. Europe's fate may be our own if we do 
not act aggressively to get our own house in order. The EU 
crisis shows that even advanced economies cannot avoid the 
consequences of excessive Government debt, high taxes and 
subpar economic growth.
    The President's budget released this week contains the 
fourth year in a row of deficits over $1 trillion. And combined 
with the slowest economic growth in a generation, these 
deficits have caused our debt to GDP to soar from 40 percent to 
nearly 70 percent in only 4 years.
    This is clearly an unsustainable path. I believe we need to 
get serious about controlling the Federal Government's debt 
while we still have the opportunity, otherwise, I believe we 
will share Europe's fate.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Shelby. Are there any 
other Members who wish to make a brief opening statement?
    [No response.]
    Chairman Johnson. Thank you all. I want to remind my 
colleagues that the record will be open for the next 7 days for 
opening statements and any other materials you would like to 
submit.
    Now I will introduce our witnesses. The Honorable Lael 
Brainard is Under Secretary for International Affairs at the 
U.S. Department of the Treasury. The Honorable Robert D. 
Hormats is Under Secretary for Economic Growth, Energy, and the 
Environment at the U.S. Department of State. Mr. Steven B. 
Kamin is director of the Division of International Finance for 
the Board of Governors of the Federal Reserve System.
    Under Secretary Brainard, you may proceed with your 
testimony.

 STATEMENT OF LAEL BRAINARD, UNDER SECRETARY FOR INTERNATIONAL 
              AFFAIRS, DEPARTMENT OF THE TREASURY

    Ms. Brainard. Thank you, Chairman Johnson and Ranking 
Member Shelby. Thank you to the distinguished Members of this 
Committee for the opportunity to testify on the issue of recent 
developments in Europe and how we are engaging to limit risks 
to the U.S. economy.
    The transatlantic partnership is an enduring cornerstone of 
our international engagement and alliances, as I know Bob will 
elaborate further. And our economic stake in Europe is immense. 
The euro area currently confronts difficult challenges of 
competitiveness, of fiscal sustainability, of liquidity.
    We believe that Europe has the will and the capacity to 
manage these challenges effectively and it's extremely 
important to our recovery that they do so. Nonetheless, if the 
euro area were to experience a deterioration of financial 
conditions or further drop in growth, this would pose important 
risks to our recovery by reducing demand for our exports at a 
time when exports are more important than ever as an engine of 
growth.
    With regard to our banking system, direct exposures of U.S. 
financial institutions to the most vulnerable euro area program 
countries are quite modest. As you know, banks have built 
thicker capital cushions and better liquidity buffers since our 
financial crisis, but our banking system still has material 
exposure to the core of Europe that could of course be 
impacted.
    And finally, the globally connected nature of financial 
markets means that stress in European financial markets would 
be felt in the United States through reduced business and 
consumer confidence, reduced credit for small businesses and 
households, which would, of course, hurt our businesses, our 
jobs and also reduce the savings and the wealth of American 
families. So we have been very focused on engaging with euro 
area leaders as they confront these complicated challenges.
    As you know, since the advent of the euro area, substantial 
and persistent internal imbalances emerged within the euro area 
with very large external deficits developing in countries such 
as Spain, Portugal, Ireland, Greece, offset by very large 
surpluses in countries like Germany. This reflected an 
underlying growing divergence and competitiveness.
    Initially, of course, private savers were willing to 
finance those, but as they retreated in the wake of a sharp 
reversal of private flows and with internal exchange rate 
adjustment off the table and fiscal integration lagging far 
behind monetary integration, restoring sustainability now 
requires difficult and prolong adjustment.
    The leaders of the euro area have pledged to do whatever it 
takes to stand behind the Euro and we believe they have the 
capacity and the resources to do so. It has been and will 
remain challenging to deliver on this pledge, of course, 
because it will require securing approval by 17 national 
parliaments for the major changes that are in contemplation.
    For our part, in addition to the actions we've taken 
domestically to strengthen the U.S. economy, the President and 
Secretary Geithner and our entire economic team have worked 
tirelessly to underscore the critical need for quick and 
forceful action by Europe to restore confidence and combat 
contagion.
    We have consistently emphasized a comprehensive four-part 
plan and need to address the root cause of the crisis with 
fundamental reforms to ensure European banks have sufficient 
liquidity and capital, put in place a more powerful firewall to 
stem contagion, and chart a sustainable path forward for 
Greece. They are making progress on all these fronts.
    On reform, as you know, Italian Prime Minister Monti is 
laying the groundwork for a much more dynamic economy. Spanish 
President Rajoy is moving aggressively to address Spain's 
vulnerabilities, and the broader euro area is putting in place 
a fiscal compact.
    The European Central Bank has taken critical actions, 
including lowering interest rates, providing liquidity banks 
and buying sovereign bonds in the secondary market. These 
actions, together with the introduction of the 3-year long-term 
refinancing operation, have significantly eased pressures in 
bank funding markets.
    Discussions on a successor program in Greece are ongoing, 
including discussions with private bond holders on a voluntary 
exchange. Greece has reduced its primary deficit, excluding 
interest, from 10.6 to 2.4 percentage points of GDP in 2 years, 
but it still has many reforms ahead.
    Finally, and perhaps most critically, the euro area needs 
to strengthen its efforts to build a credible firewall to stem 
contagion and to assure that sovereigns undertaking difficult 
reforms have access to financing its sustainable rates. We look 
forward to the outcome of the assessment by European leaders on 
the adequacy of resources in their firewall at their next 
summit in March.
    I would be happy to discuss any of these issues and the 
role of the IMF and any questions you might have. Thank you.
    Chairman Johnson. Thank you. Under Secretary Hormats, you 
may proceed.

 STATEMENT OF ROBERT D. HORMATS, UNDER SECRETARY FOR ECONOMIC 
    GROWTH, ENERGY, AND THE ENVIRONMENT, DEPARTMENT OF STATE

    Mr. Hormats. Thank you very much, Chairman Johnson, Ranking 
Member Shelby, and Members of the Committee for inviting me to 
testify on the European debt crisis and its implications for 
the United States and for our relationship with Europe.
    I am very much aware that in this whole area the State 
Department plays a sort of secondary and supporting role to the 
leadership of Secretary Geithner and Under Secretary Brainard, 
who have really been devoting huge amounts of time and 
attention and leadership to addressing this issue, and we very 
much support their efforts and have been very impressed by the 
amount of effort they have given to this overall subject.
    It takes a lot of time, a lot of visits across the Atlantic 
and a lot of conversations. And Treasury has done an exemplary 
job in addressing these issues, but we do play a supporting 
role and I will try to discuss some of the areas that we are 
involved in.
    During the political campaign, President, then Candidate 
Obama spoke in Berlin and made the point that America has no 
better partner than Europe, and that that is true today. Europe 
is, and remains, America's partner of first resort and its 
staunchest ally. The strategic alignment between the United 
States and Europe, rooted in shared history and values, has 
never been closer in addressing both international threats and 
internal challenges.
    America, since the days of Presidents Truman and Eisenhower 
and Secretaries Marshall, Acheson, and Dulles, has recognized 
that a united and prosperous Europe is of enormous interest and 
importance--indeed vital importance--to the United States, and 
we have also recognized since the days of Jean Monnet and 
Robert Schuman that closer economic integration in Europe was 
an essential underpinning to a stronger Europe and its ability 
to be a robust ally to the United States. We understood then, 
as we do now, that a prosperous Europe was important and 
remains important for a prosperous America. It was in the 1950s 
when we supported the Marshall Plan, and it is today.
    What I would like to comment on very briefly today are two 
things that we are working on, one, our transatlantic work 
toward a common agenda for economic growth and recovery 
primarily through what we call the TEC--the Transatlantic 
Economic Council, and the regulatory cooperation that it is 
engaged in.
    The Transatlantic Economic Council, or TEC, established in 
2007, led by the White House and the European Commission, 
engages senior European economic policy makers and our own 
economic policy makers to promote economic growth and job 
creation, in particular by addressing regulatory barriers and 
fostering innovation.
    One of the highlights of the last meeting was a 
comprehensive work plan on electric vehicles and associated 
infrastructure. If the U.S. and the EU can together create 
compatible high quality transatlantic standards and 
regulations, our countries can encourage other nations to 
adhere to them and reduce the clutter of disjointed unilateral 
standards that impede trade and serve as protectionist devices.
    We also have a U.S.-EU high level working group on jobs and 
growth. This is going to look at creative solutions to address 
ways in which U.S.-EU trade and investment relations can be 
even stronger than they are and promote growth on both sides of 
the Atlantic. We are quite aware that there are differences in 
some areas, but what we have in common, we share in common, is 
far greater than the differences that we have, and increased 
trade and investment on both sides of the Atlantic can produce 
growth in both of our regions.
    Then let me now focus on just a few areas of foreign policy 
where we work together. We continue to cooperate with Europe to 
address challenges that confront both of us around the globe. 
On Iran, we see no evidence that Europe's economic crisis has 
made European Governments less willing to impose vigorous 
sanctions. On the contrary, since 2011, EU member States have 
moved to expand dramatically measures against the regime in 
Iran and indeed in Syria.
    In Libya, NATO allies, together with Arab and other 
partners, work to support the Libyan people and prevent a major 
catastrophe. In Afghanistan, with nearly 40,000 European troops 
on the ground alongside our own, we have built and sustained 
NATO's largest ever overseas deployments, and we will continue 
to support the Afghans as they assume full responsibility for 
their own security by the end of 2014.
    In Syria, the EU has joined us in steadily ratcheting up 
our pressure on the Asad regime.
    On Russia, the United States and the EU worked together on 
the negotiations for Russia's accession to the WTO, which we 
think can enhance trade between all of our countries. We still 
have to address the issue of terminating the application of 
Jackson-Vanik to Russia, which will be discussed in various 
sessions to come. But we do look forward to working with this 
Committee on that, because we think increased trade with Russia 
can be another means to stimulate growth to growth on both 
sides.
    So in conclusion, let me thank you very much for holding 
this hearing. We look forward to working with Members of the 
Committee, to supporting our colleagues in the Treasury in this 
very important area, important from a financial point of view, 
important from an economic point of view, and because Europe is 
just a critical ally, extremely important also from a national 
security and a foreign policy point of view.
    Thank you very much, Mr. Chairman, Ranking Member, and 
Members of the Committee.
    Chairman Johnson. Thank you. Mr. Kamin, you may proceed.

   STATEMENT OF STEVEN B. KAMIN, DIRECTOR OF THE DIVISION OF 
   INTERNATIONAL FINANCE, BOARD OF GOVERNORS OF THE FEDERAL 
                         RESERVE SYSTEM

    Mr. Kamin. Thank you, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee for inviting me today to 
talk about the economic situation in Europe and the actions 
taken by the Federal Reserve in response to this situation.
    In the past several months, European authorities have 
provided additional liquidity to banks, bolstered bank capital 
requirements, developed rules to strengthen fiscal discipline, 
and explored means of enlarging the euro area financial 
backstop. Stresses in financial markets have eased, but these 
markets remain under strain.
    The fiscal and financial strains in Europe have spilled 
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, have found it more difficult to borrow in 
dollars. These institutions make loans to U.S. households and 
firms, as well as to borrowers in other countries to use those 
loans to purchase U.S. goods and services. Thus, difficulties 
borrowing dollars by European institutions may make it harder 
for U.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 risks to the United States, on November 
30th, the Federal Reserve announced jointly with the European 
Central Bank, or ECB, and the Central Banks of Canada, Japan, 
Switzerland, and the United Kingdom that it will 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 could impair the supply of 
credit to households and businesses in the United States and 
impede our economic recovery.
    Three steps were described in the announcement. First, we 
reduced the pricing of the dollar swap lines from a spread of 
100 basis points over the overnight index swap rate to 50 basis 
points over that rate. This has enabled foreign central banks 
to reduce the cost of dollar loans they provide to foreign 
institutions in their jurisdictions. This, in turn, has helped 
to alleviate financial strains in the global economy and put 
foreign institutions in a better position to maintain their 
supply of credit, including to U.S. residents.
    Second, we extended the closing date for these lines from 
August 1, 2012, to February 1, 2013, demonstrating that central 
banks are prepared to work together for a sustained period to 
support global liquidity conditions.
    Third, we agreed to establish swap lines in the currencies 
of other participating central banks. These lines would allow 
the Federal Reserve to draw foreign currencies and provide them 
to U.S. financial institutions on a 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.
    Information on the swap lines is fully disclosed on the Web 
sites of the Federal Reserve Board and the Federal Reserve Bank 
in 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 or payment are set at the time the draw is initiated.
    Second, each drawing on the swap line must be approved by 
the Fed, providing us with control over the use of the 
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 quickly were it judged 
appropriate to do so.
    Notably, the Fed has not lost a penny on these swap lines 
since they were established in 2007. In fact, fees on these 
swaps have added to the earnings that the Fed remits to 
taxpayers.
    To conclude, since the changes we made to our swap line 
arrangements, the amount of dollar funding through the swap 
lines has increased substantially and measures of dollar 
funding costs have declined. Ultimately, however, a sustained 
further easing of financial strains here and abroad will 
require European authorities to follow through on their policy 
commitments in the months ahead. We are closely monitoring 
events in Europe and their spillovers to the U.S. economy and 
financial system.
    Thank you again for inviting me to appear before you today. 
I will be happy to answer any questions you might have.
    Chairman Johnson. Thank you. I would like to thank all of 
our witnesses for their testimony. As we begin questions, I ask 
the clerk to put 5 minutes on the clock for each Member.
    This is for all the witnesses. What are the major sources 
of risk from the euro zone crisis for the U.S. economy? What 
are you doing to ensure our financial institutions and markets 
are prepared for these risks and to ensure that the crisis does 
not spill over to the U.S.?
    Under Secretary Brainard, let's start with you.
    Ms. Brainard. Thank you, Mr. Chairman. With regard to 
sources of risk, I think you can divide them into three basic 
categories. First, of course, is direct exposure of our 
financial system. Two, the financial system of Europe, and they 
are--I think Chairman Bernanke has testified, and perhaps Steve 
can elaborate further, but our banks are in much more resilient 
positions today than they have been 2 years ago due to much 
stronger capital buffers, better loan loss reserves and 
stronger liquidity buffers.
    Direct exposures to what is termed the periphery, the 
smaller program countries, is really quite modest. But 
exposures to the core of Europe and simply the large size of 
the European financial system and the overall system means that 
we still are monitoring those exposures. Our supervisors are 
monitoring those exposures very carefully and for us at the 
U.S. Treasury, our first priority remains preventing the 
deterioration of conditions in Europe.
    The second broad channel of exposure, if you will, is 
through our extensive trade linkages with Europe. Europe is the 
second largest euro area in Europe, more broadly. It is the 
second largest economy in the world. We have 15 percent of our 
exports going to Europe, and as you know, many of your States 
have higher percentages of exports, counting for hundreds of 
thousands of jobs that are going to Europe.
    And, of course, the third channel of transmission is 
through broader financial market volatility and we have seen 
that has abated somewhat in recent weeks, but we saw in the 
fall of last year that as financial market volatility rose in 
Europe, that transmitted here in the form of greater risk 
aversion. It can transmit through lesser credit availability 
through reduced consumer confidence, through reduced consumer 
spending due to declines in wealth.
    And so the three sets of transmission channels are very 
powerful, which is why we spend so much time focused on the 
first best strategy, which is helping our European partners to 
put in place the requisite reforms which we think they have the 
capacity to do, the will to do, to ensure that the euro area is 
on a sustainable path going forward. And we have seen a number 
of very important steps in recent months in that regard.
    Chairman Johnson. Under Secretary Hormats, do you have a 
comment?
    Mr. Hormats. No, I would just simply say that I think what 
Under Secretary Brainard said is quite in keeping in sync with 
the kinds of observations that we have made too. The Treasury 
has taken the lead in this and I think her analysis is exactly 
right.
    Chairman Johnson. Mr. Kamin, do you have a comment?
    Mr. Kamin. Sure, I would like to add and amplify just a 
little bit on the comments that Under Secretaries Brainard and 
Hormats have mentioned.
    First of all, the first thing to mention is that certainly 
an important line of defense is the actions being taken by 
European policy makers to resolve the situation. They 
understand the seriousness of it. They understand the risk that 
could be posed both to their own economy and to the global 
economy, and as we have mentioned in our testimonies, they have 
taken a large number of steps to address their problems.
    That said, certainly over the past year or so there have 
been numerous spillovers to the U.S. economy, and those could 
become more pronounced were the situation to deteriorate. As 
Under Secretary Brainard has mentioned, the first and most 
obvious channel of influence has been that trade with the 
European economy has been weighed down by its troubles. They 
have purchased less of U.S. exports and that has been an 
important consideration weighing on U.S. recovery and jobs.
    Another factor that is more amorphous, but probably 
important, is the fact that this turbulence in Europe has led 
to some declines in confidence, both in the business and the 
household sector, and that undoubtedly has had important 
effects.
    And then finally on the financial side, there is really 
quite a host of different channels that link our two regions 
and these are ones that Under Secretary Brainard has mentioned, 
but just to repeat, the direct exposure of U.S. financial 
institutions to the most embattled Governments in Europe is 
relatively small and manageable. But our institutions do have 
exposures to banks in core Europe, those outside the 
periphery--which themselves are exposed to the peripheral 
Europe, and that is an important issue of concern.
    Another one is the fact that our money market funds, which 
again have substantially reduced their exposures to the 
peripheral European economies and have reduced to some extent 
their exposure to core Europe, nevertheless retain material 
exposures.
    And then finally, I think it's very important to underscore 
in this situation that a lot of the channels of spillover from 
Europe to the United States may occur less by impacting direct 
credit exposures than through more amorphous channels of 
financial sentiment.
    What we have seen is that in situations where the European 
financial situation has deteriorated, that has triggered a 
retreat from risky assets around the world, leading to declines 
in stock prices, increases in credit spreads and reductions in 
the availability of credit. And all those factors have played a 
role and could play a more pronounced role were the situation 
to worsen.
    So now in terms of the responses of the Federal Reserve and 
other regulators have made, well first of all, most 
prominently, as I have mentioned in my testimony, the swap 
lines that we provided and reduced the cost of have been one 
way that we have been able to channel dollar liquidity to 
European and other institutions.
    Along with that, we have been keenly aware of the need to 
increase the resiliency of the U.S. financial system to all 
manner of shocks, including debt from Europe, and thus, we have 
been working, as Under Secretary Brainard has mentioned, with 
our banks to improve--to increase their capital positions and 
improve their risk management practices.
    Along those lines, we have been working with the banks we 
regulate on ongoing stress tests to make sure that their risk 
management systems are up for the chance of handling some 
pretty severe shocks.
    Thank you.
    Chairman Johnson. Under Secretary Brainard, Secretary 
Geithner has said that the U.S. has no plans to provide 
additional resources to the IMF, as evidenced by the absence 
of--or question the President's current budget proposal.
    What is the role of the IMF and the ongoing crisis in 
Europe and the role of the U.S. in the IMF?
    Ms. Brainard. I want to say just first that we believe that 
the IMF has been playing and should continue to play a 
constructive role in support of Europe's own efforts to address 
the crisis in the euro area. The IMF brings to the table 
unsurpassed technical expertise. It brings to the table 
tremendous credibility in assessing the viability of countries' 
reform programs. And in the three program countries it has 
provided a minority share of financing, and we think that is 
appropriate.
    But while the IMF should continue to play a constructive 
role in Europe, we believe that IMF resources cannot and should 
not be a substitute for a strong European firewall and we have 
been very clear that we do not intend to seek further funding 
for the IMF from Congress this year.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you. I would like to get into the 
condition of some of the banks in Europe. You alluded to it. I 
think it is common knowledge that most of the banks in Europe, 
the big banks, are undercapitalized and they are having 
trouble--they will have trouble meeting the Basel III mandate 
and so forth.
    What has the European Bank done? Have they loaned money to 
these banks for their capital? What have they done, a 3-year 
loan? Explain what they have done there.
    Mr. Kamin. Well, there have been a number of actions that 
have been taken by European authorities in order to address the 
situation of the European banks.
    Senator Shelby. Can you speak into the mike just a little?
    Mr. Kamin. Oh, I am sorry. So, to begin with, as you 
mentioned, the ECB has stepped up their provision of lending to 
these banks and these are the actions that have garnered the 
most attention recently----
    Chairman Shelby. Is that a 3-year loan?
    Mr. Kamin. Yes. Originally, they started off offering loans 
of shorter maturities, working up to a year. And they found 
that the uptake on those loans was not great, or as great as 
they might have anticipated, and then in December they 
announced that they would offer, at least to start, two 
auctions of 3-year loans that were basically at their main 
refinancing rate of interest, which is currently around 1 
percent, although that rate could move up over time.
    So when they offered that auction later in December, they 
basically received substantial bids and ended up lending 489 
billion Euros, which is a very substantial amount. And that 
action, along with the other actions being taken by European 
authorities, appears to have been very helpful in alleviating 
the immediate funding pressures that were facing European 
banks.
    Now, offering liquidity is not the same thing as 
recapitalizing the banks.
    Senator Shelby. Two different things.
    Mr. Kamin. Those are different things. And so the European 
authorities have on a parallel track taken a number of measures 
to improve their capital positions as well. Most prominently, a 
little bit earlier in the fall, the European Banking Authority 
set out a requirement that all European banks would be required 
to achieve a 9 percent of core tier one capital requirement.
    Senator Shelby. In what year will they be required to do 
that?
    Mr. Kamin. That will need to be met by the middle of this 
year. And they have already been required to submit plans to 
the EBA, European Banking Authority.
    Senator Shelby. Where is that capital going to come from?
    Mr. Kamin. Well, that is an excellent question and one that 
created a lot of concern among markets because there was a lot 
of fear that the way that capital ratio would be achieved is 
through deleveraging, selling off assets, maybe reducing loans, 
and thus, making the recession worse.
    In the event--so December 1st, the EBA estimated that the 
amount of capital that would be required by the banks would 
come in somewhere in the neighborhood of 115 billion Euros, 
which is a substantial, but not exorbitant sum. More recently, 
after having received capital plans from a broad range of 
European banks, their assessment was that the broad bulk of the 
capital raising would not come through deleveraging per se, but 
through other measures, to increase capital, such as retained 
earnings and the like. And that is kind of where things stand 
at the moment.
    Senator Shelby. You are not telling us here today that the 
European banks are in good shape though, are you?
    Mr. Kamin. Since we do not regulate and supervise those 
banks, that is a difficult--I would not want to go that far. I 
am only explaining how things have been proceeding. I take the 
point that the health and position of European banks is an 
incredibly important part of revealing confidence in the euro 
area institutions more generally, and so obviously that 
situation is one we are monitoring very carefully.
    Senator Shelby. How many of our big banks regulated by the 
Federal Reserve here are exposed in Europe? We have seen other 
data up here that shows more exposure than has been said here 
today, not just to Greece, but to Portugal, Spain, and so 
forth.
    Mr. Kamin. I am not in command of the specific numbers on a 
bank by bank basis. Obviously----
    Senator Shelby. Can you get that information to the 
Committee?
    Mr. Kamin. I would have to consult with my colleagues. That 
seems like----
    Senator Shelby. In other words, that would be a decision 
for the Federal Reserve?
    Mr. Kamin. I would think so. So I would have to consult 
with my colleagues on the issues of the----
    Senator Shelby. Wouldn't you think they would be wanting to 
share this with the Senate Banking Committee?
    Mr. Kamin. I would think that they would want to. I would 
want to obviously consult among others with our Counsel.
    Senator Shelby. Secretary Brainard, tell me exactly what 
the IMF is doing? We are the largest contributor to the IMF, 
the American taxpayer. Are they using the IMF as a bailout of 
Europe? Isn't that what they are really doing, underlying all 
of this? That is what a lot of people think. And if they are 
not, explain why not.
    Ms. Brainard. Senator Shelby, it is a good question. I 
think you are right; there is a lot of misimpression out 
there----
    Senator Shelby. A lot of concern.
    Ms. Brainard. ----about the IMF's role. I think what we 
believe is that by virtue of being the largest shareholder in 
the IMF, we have a very unique ability to influence policies 
and reforms that are being undertaken in crisis-stricken 
countries and that ability to shape those outcomes----
    Senator Shelby. Does that include the European Union?
    Ms. Brainard. Including in some of the euro area countries 
that have gone to the IMF, Greece, Portugal, Ireland. And that 
matters to us because, of course, as we have just been saying, 
the spillover to our economy could be quite large. And so it is 
very important for us in order to protect our recovery at a 
fragile time and to protect our jobs.
    The primary role that the IMF is playing as a partner to 
the European area institutions is helping to create viable 
programs, helping countries commit to and undertake reforms 
that will fundamentally address the problems of slow growth, 
lack of competitiveness, that dog them for the years leading 
into the crisis. And we think the IMF brings unparalleled 
credibility to that task and unparalleled technical knowledge.
    The role that the IMF plays and the role of the U.S. in the 
IMF give us an ability to shape outcomes in Europe that we 
would not otherwise have, and I think that is why in 2009, 
Congress moved very rapidly to provide support for the IMF's 
actions that were really pivotal in turning around the global 
economic crisis and helping to protect our recovery.
    We continue to think that the IMF's role in Europe and our 
role in the IMF are very protective of American national 
interests, even as we believe the IMF has adequate resources, 
and that we do not see any need for the U.S. to provide 
additional resources to the IMF at this time.
    Senator Shelby. Quickly, my time is running out. Secretary 
Hormats, how can the European Union stay together when you have 
productive countries that work until they are nearly 70 years 
of age, like Germany, and others, and save and so forth, and 
you have a lot of other countries that borrow and borrow, do 
not save, do not produce; how can they stay together?
    A lot of people think the European Union as we know it 
cannot stay together; it will not work.
    Mr. Hormats. Well, two points. One, as I mentioned in my 
testimony, it is very important from an American point of view, 
we have encouraged over the course of decades a more united, 
more cohesive Europe. So the economic unity of Europe is very 
important to us.
    The second point relates to the direct question you have 
asked, and that is, as Lael has pointed out, the United States 
is doing a great deal to work with these countries to help them 
support the kinds of changes they need from a financial point 
of view. But it is very much up to them to address, 
particularly those that are least competitive, their 
competitive challenges.
    Money alone is not the answer. It can get them over this 
period. However the issue of competitiveness has to be 
addressed, but it is not easy to address. I do not want to 
create any impressions that it is. But many of these 
Governments understand that a fundamental problem, even aside 
from the financial part, is their lack of competitiveness, vis-
a-vis countries in Northern Europe and indeed very competitive 
countries elsewhere in the world.
    So what they need to do is make changes like reforms in 
their labor markets and other reforms that will enable them 
better to compete on this world stage with other countries in 
Europe and other countries around the world. And they need to 
take the time that they are going to be able to get through the 
kind of support that they are receiving, or in some cases are 
about to receive, to make fundamental changes.
    That will depend on political leadership, explaining to the 
people in these countries that they cannot continue to operate 
in a global economy that is becoming more and more competitive 
unless they change their institutions, their practices, in some 
cases, their psychology, to be much more competitive in this 
global environment.
    This is a challenge. Certainly it is a challenge for the 
Greek Government. It is a challenge for other Governments. 
Prime Minister Monti has addressed this in a very forthright 
way since he has come into office--to explain the need for the 
Italian people and the Italian Government, the Italian system, 
to become more competitive. The Government of Spain has made 
similar statements to its own people, the Government of 
Ireland, indeed many others.
    So competitiveness is very important. If you look at 
Germany, they have done a lot of things over the years to make 
their labor force more competitive, and their business 
environment more competitive. And it is very doable, but it is 
very difficult and it requires political leadership and a 
recognition by citizens of these countries that money alone is 
not the answer. They have to make very serious domestic changes 
to be more competitive now and into the future, and start the 
effort right away and make it a national commitment. Without 
that, their competitiveness simply will not rise to the 
requirements required in this more competitive global 
environment.
    Chairman Johnson. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman. Secretary 
Brainard, have you an operational plan for the worse case that 
has been staffed and game planned out with you, Treasury and 
the Federal Reserve? Have you gone down to that level of 
planning for the possibility? And this is all in the wake of 
thinking back a few years when some people thought that the 
system could absorb the Lehman bankruptcy and that they could 
not.
    What level of planning have you undertaken?
    Ms. Brainard. Well, Senator Reed, I think that having just 
been through a very fundamentally disruptive financial crisis 
of our own, we are aware of how quickly market dynamics can 
shift the channels of transmission through which contagion can 
spread, and the absolute need for a proactive and decisive 
action.
    We have, of course, along with our colleagues on the 
Financial Stability Oversight Council, which has repeatedly and 
continuously looked at events in Europe with a view to 
protecting our economy, so we have tried to, as deeply as 
possible, understand the potential sources of instability in 
Europe and to provide the best possible advice through many 
channels of communication through the various decision nodes in 
the euro area system.
    So we are working with the Fed--and I am sure Steve can 
comment on this as well--as with other members of the Financial 
Stability Oversight Council, and we are trying to both 
understand in as much detail as possible potential exposures, 
potential vulnerabilities, trying to be as proactive as 
possible in sharing our views of what is most effective in 
preventing a further deterioration, and of course, trying to 
put in place policies and mechanisms that will be protective of 
our system.
    Senator Reed. Let me ask in a slightly different way before 
I ask Mr. Kamin, which is, you made a point that I think is 
very important, is that one of the things the Europeans have to 
do, regardless of whatever happened to Greece, is create a 
firewall, several different policies, techniques, institutional 
arrangements.
    Are we likewise, in an abundance of caution, thinking in 
terms of what firewalls we might have to have in place should 
there be a serious deterioration in Europe?
    Ms. Brainard. Well, in the wake of the Dodd-Frank Act and a 
number of changes that were made in response to the financial 
crisis, we are, obviously, and the Financial Stability 
Oversight Council is keeping very close tabs of what capacities 
we have to respond to crises.
    This Committee is more familiar than anybody with the kinds 
of capacities that each part of the financial supervisory and 
policy making authorities have to both prevent and respond to 
crises. And so we have made sure to be both very aware of what 
possible contingencies could arise and the mechanisms that we 
have in our system to again protect our recovery, protect our 
financial system, protect our jobs.
    Ms. Reed. Mr. Kamin, your comment, one point you might 
mention, because my time is dwindling down, where you talked 
about the transmission mechanism. One of the most difficult to 
gauge is the derivatives, the exposures by American 
institutions to counterparties that might have exposures in 
Europe.
    Do you feel that the Federal Reserve has detailed 
information on those types of indirect exposures which became 
very critical in the 2008 crisis, particularly in the context 
of AIG; I don't have to remind you?
    Mr. Kamin. Thank you, Senator. So first of all, I will 
underscore the points that Under Secretary Brainard noted, 
which is that, you know, several of the regulatory agencies 
under the auspices of the FSOC are obviously very alert to all 
manner of risks that could affect the U.S. financial system, 
and obviously we have taken very close look at Europe and we 
are monitoring debt very closely and giving thought to the 
broad range of policies that could be undertaken in response.
    With that said, it is important to underscore the very 
first line of defense against any type of shocks is to make 
sure that the financial system is very resilient. And that is 
why we have been working so closely with the institutions we 
regulate, not only to make sure that their capital and 
liquidity positions are well buffered, but also to ensure that 
their own risk management systems are well calibrated to deal 
with any manner of very large shocks.
    So that is a very important focus of our attention. 
Obviously, as you point out, derivatives exposures are very 
important and we have been working, talking very closely with 
the banks to look at their derivative exposures, and to 
ascertain that they are within appropriate limits and that 
there are not concentrations of derivative exposures in the 
system so that we do not have a repeat of some of the unwelcome 
developments that took place during the last financial crisis.
    Senator Reed. Thank you. My time is up.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and I thank each 
of you for your testimony. I saw the two secretaries recently, 
I guess, at a meeting with a lot of European officials and 
while a lot of times we--sort of the main Europe in many ways 
for being a dollar--a day late and a dollar short, I get the 
sense they may actually do the things they need to do to work 
through this and I think there is a strong commitment to that 
and certainly hope it happens.
    And candidly, they are beginning to address many of the 
issues that we in our own country are not yet willing to 
address and I know that is because they are in a crisis mode. 
We are not yet in that crisis mode, but moving there fairly 
quickly. But I appreciate your leadership in that regard.
    Secretary Brainard, I very much appreciate the stance you 
all have taken with the IMF. I know there are a lot of concerns 
up here about maybe additional requests, but I think the way 
you have handled the IMF has caused them to have to focus on 
Europe, solving Europe a little bit more, and I think any time 
they feel there may be additional funding coming, it may lessen 
the degree of strength they have behind what they are trying to 
push Europe to do. So I thank you for that very much, in 
clearing up today that again, that there is going to be no 
request.
    And Director Kamin, on the swap lines, I know there have 
been concerns there, but I think people realize now that when 
you swap, you unwind that swap at exactly the same rate you 
entered into it. They are short term. The European Central Bank 
is behind that, and then all the countries, and I think people 
realize now that there is probably less risk involved in that 
than they first thought.
    The one thing I would like to focus on though is there is--
the issue of issuing credit in Europe is still a problem. And 
we watch each week as the various countries issue debt and see 
whether it has cleared. And yet there is wide concerns being 
issued by foreign Governments about a rule that we put in 
place, the Volcker Rule, because they realize that there is 
going to be a lot less liquidity in their own currencies--in 
their own debt, excuse me.
    You know, I was not a proponent of Volcker Rule. I did not 
think there was any reason to pursue it, but I do think there 
is a way to fix the Volcker Rule and move away from the prop 
issue and focus on at least maintaining liquidity. A lot of 
foreign Governments have been concerned that we selfishly, 
self-centeredly allowed treasuries and mortgage-backed 
securities to be excluded from the Volcker Rule, which I think 
gives a pretty good indication that our Treasury secretary and 
our Fed chairman did not think the Volcker Rule as written was 
a very good idea.
    But is there a way that you think we could fix the Volcker 
Rule so that we do not create a lack of liquidity for these 
foreign Governments that are very concerned about our 
relationship with them in that regard now?
    I will start with you, since you are with Treasury.
    Ms. Brainard. Well, we are--we have received, of course, 
the supervisor agencies that are undertaking the rulemaking. 
Also received foreign comments, as well as domestic comments on 
the potential impact of the Volcker Rule and consistent with 
our statutory responsibility to coordinate the rulemaking 
process, we have helped arrange discussions between the 
independent rule rating agencies and foreign Governments to 
express those concerns.
    Our general view, of course, is that there is currently a 
public comment period that has been extended for purposes of 
receiving comments.
    Senator Corker. Let me ask it a little differently----
    Ms. Brainard. Yeah.
    Senator Corker. ----so I can get an answer before the time 
runs out. You think there's a way that we can cause the Volcker 
Rule to be altered so that the market making components that 
are very valuable to these foreign Governments that are issuing 
debt can continue? Yes? No?
    Ms. Brainard. The statute, as you know, exempts U.S.----
    Senator Corker. I have already stated that, right.
    Ms. Brainard. ----sovereigns and does not exempt foreign 
sovereigns. I think I would really have to hand it over to the 
rulemaking agencies, who are probably not yet in a position to 
comment on it, to talk about how their rulemaking comments----
    Senator Corker. Well, let me go there, since we are running 
out of time. Thank you so much. I appreciate it.
    Mr. Director, do you think there's a way to craft the 
Volcker rules so we do not have this unintended consequence, 
although I think for some people it was intended, but the 
unintended consequence of causing debt by foreign Governments 
to become illiquid, along with corporate bonds and everything 
else in that category?
    Mr. Kamin. Senator Corker, we appreciate the difficulty of 
this issue and we have certainly received the comments from 
foreign Governments on that. My colleagues at the Federal 
Reserve are carefully considering these issues and we are 
working on it further.
    Senator Corker. I appreciate the nonanswers that I have 
received and I think that does speak to the difficulties of it 
and even though you gave me a nonanswer, I thank you for your 
service.
    Chairman Johnson. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman. And I want to 
thank all of you for your service, as well and for being here 
today.
    I want to pick up on what Senator Corker's initial 
observation was, to ask you to give us a better sense of the 
domestic politics in these countries. You know, looking at--you 
mention, Madam Secretary, that in the end 17 parliaments are 
going to have to ratify these changes. For all I know, in some 
cases there are going to be popular referenda.
    I wonder if you get a sense of what the timeline is for 
when that work has to be accomplished, but also what the 
equities are that people are wrestling with over there between 
the need for posterity and fiscal responsibility, the need to 
get these economies moving again. Because in my limited 
experience here, what I have come to understand is how 
incapable we have been of addressing the fiscal challenges that 
this country is facing.
    I can only imagine how complex that is when you are talking 
about all of these countries in Europe. And then a follow-on 
would be how do they view our current wrestling match, or lack 
of a wrestling match around solving our own fiscal problems 
here?
    Anybody that would like to take any of that.
    Ms. Brainard. Well, I think that the deadlines, the 
timelines that the Europeans have set themselves on, things 
like the fiscal compact, are quite tight. They need to get 
through a number of votes over the next few months in order to 
stand up the new permanent crisis response fund.
    They will also need to take a number of parliamentary votes 
over the next three to 4 months. And then as you say, national 
parliaments also have to put in place the requisite fiscal 
reforms and structural forms. The structural forms are in many 
cases the more difficult and the more controversial in 
countries that have really seen a fundamental deterioration of 
competitiveness over the last decade or so.
    I think if you look across Europe, we, of course, recognize 
that political changes are slower than markets and so I think 
we all would like to see it move faster, but the truth, that 
there have been very remarkable strides forward in a very short 
period of time.
    If you look from Italy to Spain, if you look at the kinds 
of changes that the German Bundestag has needed to approve, 
these are difficult votes, as you know, from our votes here in 
the U.S. on the various mechanisms needed to address the 
financial crisis. And so we have to, I think, give them a great 
deal of credit for the actions they have taken.
    With regard to the U.S., I would say that the challenges 
faced by Europe are fundamentally in many respects different 
from those faced by the United States. Europe went into a 
monetary union with incomplete fiscal institutions and really 
no mechanisms for undertaking internal transfers and probably 
inadequate product market, labor market mobility to be able to 
withstand this kind of reversal of sentiment, and they are now 
working very diligently on those challenges.
    The United States, in many regards, we have a unified 
Government. We have a very effective and credible central bank. 
We saw a lot of collaboration, moved very quickly to address 
problems in the financial system with support from Congress 
during the crisis. We have seen our financial system come back 
very quickly, but we should not allow those advantages to lull 
us into a false sense of complacency, and that is why the 
President wants to work with Congress to put the Nation on a 
fiscally sustainable path.
    We still need to protect our economy as an insurance 
policy, in particular against potential spillover from Europe, 
and that is why the payroll tax cut, the unemployment measures 
were so important in the short run, but by the same token, 
getting our debt down, getting our deficits down over the 
medium run are critical to the long-term competitiveness of 
America.
    Mr. Bennet. Thank you. Mr. Secretary, do you have anything 
you would like to add before time runs out here?
    Mr. Hormats. I will be very quick. Just to focus on the 
structural adjustment point that you mentioned. I do think that 
is one of the things. In the midst of all the other financial 
discussions that have been going on, there needs to be, now 
that some progress is being made at least on some aspects of 
that, a lot of focus on the structural changes to improve their 
competitive capabilities and to improve the structure of 
European cooperative institutions in order to work together to 
deal with some of the longer term fiscal problems that Europe 
has. It was sort of an incomplete union and now they have to 
take a number of measures to complete it, to strengthen fiscal 
cooperation in Europe.
    And each of these individual countries, the ones that have 
gotten into trouble, in large measure it is in part because of 
their large amounts of borrowing, but in part because they 
really did not do enough to strengthen their competitive 
capabilities and therefore, they fell further and further 
behind, which meant they had to resort more and more to 
borrowing.
    To the degree that they can strengthen their competitive 
capability and do better in terms of earning more in 
international markets and improving the competitive capability 
of their workforce, they will be less dependent on the kinds of 
programs that got them into this problem, and the kinds of 
financial flows that got them into this difficulty in the first 
place.
    It takes time, because each one of these requires a measure 
of pain and requires a measure of political sacrifice. But the 
longer term consequences of their not making these sacrifices 
internally will be even worse and more painful than the short-
term difficulties they may have in getting over this period.
    So they may have to sacrifice some short-term pain in the 
near term to improve their longer term outlook.
    Senator Bennet. I think much could be said about that here.
    Mr. Hormats. Many countries one can say that about, but I 
think you have to have a longer term vision and the political 
process has to come together in these countries. And I think 
Greece, for instance, is one example. In Italy and many others 
the political system seems to realize that they have to pull 
together to tell people that some tough measures need to be 
taken in the short term in order to improve things in the long 
term. And if they do not take the tough measures in the short 
term, things will only get worse in the long term.
    Even if they do get more money, without such measures they 
will get worse because the money will not buy them fundamental 
answers to their fundamental competitor problems.
    Senator Bennet. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair.
    Director Kamin, you were talking about--looking at the 
banks and looking at the concentration of credit default swap 
exposure and funding, there was no significant concentration 
that poses any--I think it was appropriate or within 
appropriate boundaries. You were speaking to U.S. banks in that 
commentary, I believe.
    Have you looked at the exposure of the major banks in 
Europe to the credit default swaps? I'm speaking specifically 
about swaps on Spain, Portugal, Ireland, Italy, the big five.
    Mr. Kamin. We obviously do not have quite as much 
information about those as we do about our own institutions, so 
I cannot speak definitively on that.
    Senator Merkley. Let me put it--so the answer is no?
    Mr. Kamin. I do not know.
    Senator Merkley. You do not know?
    Mr. Kamin. I do not know. I do not know of any particularly 
market concentrations of CDS exposure among European banks that 
would pose a threat, but I cannot at the same time discount the 
possibility.
    Senator Merkley. So the answer is you do not know?
    Mr. Kamin. The information we have is fragmentary and so I 
would not want to rely on that heavily.
    Senator Merkley. So the answer is you do not know.
    Mr. Kamin. It is something in between that.
    Senator Merkley. OK, well, every other expert said we do 
not know, so if the Fed has special insight to share with the 
world on this, it would be helpful. And your comment is it is 
fragmentary, we are not sure, but we are not too worried; is 
that what you are trying to convey?
    Mr. Kamin. Well, I think maybe I will retreat back to I do 
not know.
    Senator Merkley. OK. OK. Thank you. As we look at this 
issue of these swap lines with the European banks, and 
essentially we are putting out the short-term swaps of dollars 
for Euros, what kind of timeline are those on? Do those happen 
on a daily basis, a weekly basis, what kind of period before 
the swap returns?
    Mr. Kamin. The auctions are weekly. The terms vary, but 
there is the usual maturities at 1 week and 3-month. Those are 
where a lot of the preponderance is.
    Senator Merkley. So do we find ourselves in a situation we 
are essentially rolling that over pretty continuously? Because 
if we do not roll it over, there is a charge of dollars on the 
European side. That is a challenge. So even if they are short 
term, if they are being rolled over, they create kind of a 
long-term engagement.
    And the question I want to raise here, do we end up in a 
situation where essentially if the Euro falls and they are in a 
hell of a spot if we do not continue the swaps, so it really 
kind of becomes a long-term commitment on a risky currency?
    Mr. Kamin. Well, as I pointed out in my testimony, we do--
the Federal Reserve does have the option of basically approving 
drawings as they are made on a weekly basis and this gives us 
the security that if we foresee events down the road which are 
problematic, that we could wind down these positions.
    And the situation that you alluded to, that will be the 
decision for the FOMC. It would have to address that as the 
situation came up and a lot of issues would come to play like 
the ones that you have raised.
    Senator Merkley. But there is risk that as we try to unwind 
those positions that we accentuate the crisis and it is a hard 
thing to manage. It is a challenging picture.
    Mr. Kamin. Well, one most likely way that those positions 
are unwound is the way that they were unwound after the last 
crisis, which is that after the crisis eased and banks found 
other means of funding themselves, more attractive than swaps, 
then they went ahead, repaid the swaps and the lines unwound 
automatically.
    Senator Merkley. I thought I would turn--I thank you very 
much. I thought I would turn to the Volcker Rule since my 
colleague from Tennessee brought it up, and just clarify market 
making. There is absolutely no restriction on market making. 
That is not the issue the Europeans are raising. They are not 
raising the market making. They say we want the banks to be 
able to use their considerable assets to invest in these 
products, that is, to invest the same way IMF Global invested.
    The question of the Volcker Rule is are we going to allow 
that proprietary trading inside the structure of a repository 
lending institution, or are we going to put up a firewall and 
say you got to do it on the other side of the firewall? So 
since you all didn't clarify that for my colleague, I thought I 
would clarify it, and if I am wrong, please, I will open up the 
panel and have someone explain how it works otherwise.
    Please, Madam Secretary.
    Ms. Brainard. As you know, we strongly support the overall 
thrust of the rule, which is to ensure that the safety net is 
not extended to activities for which it was never intended, and 
prop trading, of course, is among those activities.
    I think the comments from foreign authorities have gone to 
the compliance costs of making those distinctions. And again, I 
think those rules are sitting with the rulemaking agencies who 
are taking them into account in their rulemaking process.
    Senator Merkley. Thank you. Thank you all.
    Chairman Johnson. Under Secretary Brainard and Under 
Secretary Hormats, what effect will the austerity measures have 
on economic growth within Europe, especially Greece?
    Ms. Brainard. Mr. Chairman, the measures that Greece is 
undertaking, both on the fiscal side to run a primary surplus 
within a short number of years, and on the structural side to 
vastly increase its competitiveness, will over the medium term 
put Greece on a stronger path of growth, a more dynamic economy 
and an economy that is less saddled with debt.
    The short run, however, is very daunting for the Greek 
people and they continue to be, from everything we have seen, 
very committed to the euro area. But I think, of course, these 
are very difficult reforms that they are undertaking. And we 
support the euro area as it works to support Greece during the 
period that those reforms are being put in place.
    More broadly, we think there is some space within the euro 
area for some countries to support growth, and that that would 
help ease the impact on growth of the reforms that are being 
taken in the countries that most need to address external 
imbalances and fiscal imbalances. There has been some talk by 
European leaders about a growth agenda, but again, I think we 
think there is more scope in the short run for the internal 
dynamics of the euro area to be eased somewhat by stronger 
growth in the surplus countries.
    Mr. Hormats. I would agree with Lael. I would just like to 
add one point to this and that is that we, over countless 
years, have seen countries go through very severe adjustments 
when they get into balance of payments, difficulties of the 
kind that a number of European countries are facing today, and 
they take very severe measures to get out of them.
    But over a period of time, and you can point to examples 
from Indonesia to South Korea to Turkey to a number of other 
countries, of countries that have gone through very difficult 
adjustment periods and have done two things. One, they have 
gone through the financial part of the adjustment, but two, 
they have used the period of time that they have had as the 
result of getting support from other countries to make very 
substantial internal changes that have enabled them to be far 
more competitive and to have far stronger economies and indeed 
to have higher rates of growth than they had going into the 
crisis.
    And I think that while in Greece there are demonstrations 
and there are a great many concerns now, if you look at the 
record of countries that have undertaken very tough adjustment 
programs and done them well and used the time to be more 
competitive, their growth rate and their ability to create jobs 
over the medium term has been quite impressive, and therefore, 
while we look at this troubled environment today, the prospects 
of doing the right things with support from Europeans and 
others and making the internal changes can lead to higher 
growth and job creation over the medium and longer term.
    Other countries have done it. We have seen this in various 
parts of northern Europe and we can see it again if they do the 
right kinds of things.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you. You know, we talk about all the 
time of rescuing this country, of rescuing this bank or 
rescuing a lot of banks by loaning them money, so to speak, or 
loaning this country more and more money, money that will 
probably never be paid back, for example, Greece, and they are 
not by themselves. I think of ourselves. That money, Greece 
can't pay that money back. There is no way to pay it back, I 
mean unless they appreciate their currency, and they cannot do 
this with being in the European Union. I think a lot of 
economies are of that opinion.
    What bothers me here, or maybe this is a concern me--will 
we, we in America, learn anything from the European crisis? 
Because we are going down the same road, debt, politics of 
expectancy, you know, promising more than we are paying for and 
so forth.
    Madam Secretary, you touched in your testimony on some 
priority dealing with reform. Reform is tough and you have seen 
a little bit of it in Greece with the demonstration. That is 
just probably the beginning. But what does Europe have to do? 
Four things you mentioned and I just want to reemphasize them, 
to get their house in order, otherwise they are just going to 
muddle down the road. What are those four things? And some of 
them are tough.
    Ms. Brainard. Very tough. They need to undertake fiscal 
reforms and structural forms in particular countries.
    Senator Shelby. What do you mean by that, just for the 
audience?
    Ms. Brainard. So for a country like Greece that really did 
have an unsustainable public sector, they need to----
    Senator Shelby. And noncompetitive, right?
    Ms. Brainard. They both have a--they both had an 
unsustainable public sector and big competitiveness problem 
emerging. So in the case of Greece, they have both big fiscal 
reforms they need to undertake, raise revenues, cut 
expenditures.
    Senator Shelby. Huge Government, a lot of people working 
for the Government?
    Ms. Brainard. They have a very large public sector relative 
to the size of the economy. No comparison with most other 
advanced economies that you are familiar with. And, of course, 
they have also a lot of rigidities in their product and labor 
markets that they are working to undertake.
    I think it is very important to underscore there are big 
differences among the European countries. Italy, for instance, 
ran primary surpluses for 17 years going into the crisis.
    Senator Shelby. What do you think about primary surpluses?
    Ms. Brainard. So essentially, they ran a surplus.
    Senator Shelby. Just sovereign?
    Ms. Brainard. A surplus, a fiscal surplus----
    Senator Shelby. OK.
    Ms. Brainard. ----for 17 years when you exclude their 
interest payments on their debt. They made a massive reduction 
in their overall indebtedness. Their issue going forward that 
Prime Minister Monti is really grappling with very forcefully 
is their growth needs to be greater and their competitive needs 
to be enhanced.
    So the first is reforms, but I want to emphasize again they 
really are differentiated by different countries. Second is 
they need a stronger banking system, and in the short run they 
need to make sure that their banking system is getting the 
liquidity it requires to retain the confidence of depositors 
and funders.
    And they are working on that and they need to strengthen 
their capital buffers as well, which has been talked about 
already. Greece, again, is a special case and they need to work 
right now. They are working on achieving sustainability.
    And the final thing, and I just want to make sure that I am 
clear on this, they need to put in place a firewall that 
protects the larger economies like Italy and Spain from 
unwarranted contagion. And the whole theory----
    Senator Shelby. By firewall, give us an example.
    Ms. Brainard. The whole theory of the firewall is if you 
can show that while Italy and Spain move forward on these very 
ambitious reforms, there is a backup----
    Senator Shelby. Including their labor markets, including 
their competitiveness?
    Ms. Brainard. Across the board structural reforms. As they 
move forward on that, that they will be able to fund themselves 
at sustainable rates. Then the market confidence that comes 
with that firewall makes it very unlikely you ever have to tap 
into it.
    And I want to distinguish between that and countries where 
they actually are borrowing from the euro area for a short 
period of time while they get their fiscal trajectory under 
control. So those are the four things we have been pushing on. 
And again, I want to say the Europeans have made big strides. 
We think they need to continue to move forward on all four 
fronts and we think they are committed to doing that.
    Senator Shelby. Do you believe that Germany can carry all 
of Europe on its back?
    Ms. Brainard. Since the reforms that are being undertaken 
are really a collective endeavor on the part of all the euro 
area countries, and I have to say that Germany and Germany's 
leadership has been very clear about this, it has benefited 
tremendously from being a member of the euro area and appears 
by all measures to be extraordinarily committed to the 
sustainability of the euro area.
    Senator Shelby. How many countries in Europe are right now, 
just off hand, in a recession? I know a number of them. And 
which ones are, their growth has slowed down a little?
    Ms. Brainard. I do not have the full set of countries that 
are in recession, but certainly the countries that have been 
under some financial stress have seen a big deterioration in 
the growth prospects and the IMF is forecasting deterioration 
in the coming years. So that would include Greece, Ireland, 
Portugal, Spain, and Italy.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Johnson. I would like to thank the witnesses for 
your testimony and for being here with us today. I ask that you 
keep us updated as events unfold in Europe.
    This hearing is adjourned.
    [Whereupon, at 11:26 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
    Today we discuss an important and timely issue: the European Debt 
Crisis. As we speak, events are unfolding that will determine the 
future of Greece, its neighbors, and the European monetary union.
    As our largest trading partner and a vital strategic partner, 
events within the European Union also have an impact on the United 
States.
    While I hope that the situation in Greece can be resolved in an 
orderly way, many nations across Europe including Greece will continue 
to face difficult and unique economic conditions and will have to make 
tough decisions.
    Today we will hear from the Treasury Department, the State 
Department, and the Federal Reserve. Keeping the momentum going in our 
economic recovery is important to me and my constituents. I ask that 
these three agencies continue to monitor the situation in Europe 
closely to ensure that any potential spillover effects in the U.S. are 
minimized.
    I look forward to hearing an update on the situation in Greece, the 
impact of a possible agreement on Greece's fiscal situation, and 
Greece's future in the euro zone.
    Second, in some European countries we have seen resistance and 
upheaval in reaction to the debt crisis that could present obstacles 
for recovery. I would like your analysis of how the debt crisis is 
impacting the broader political situation in Europe.
    Third, I would like to learn more about efforts to recapitalize 
European banks, the exposure the U.S. financial system may have to the 
ongoing turmoil in Europe, and the strength of our banks to withstand 
any potential external shocks.
    Last, the I.M.F. will continue to play a role in helping to find a 
solution for what's happening in Europe. I would appreciate your 
evaluation of the I.M.F.'s role in dealing with the debt crisis in 
Europe, and how the U.S. has interacted with the Fund.
    This hearing is an important part of this Committee's continued 
oversight efforts. Because of the Wall Street Reform Act and other 
actions by the U.S. financial regulators, I believe that we are better 
equipped today to deal with any potential fallout from the euro zone's 
debt issues. I thank our witnesses for being here today, and appreciate 
the updates you can provide us on the situation in Europe.
                                 ______
                                 
                  PREPARED STATEMENT OF LAEL BRAINARD
 Under Secretary for International Affairs, Department of the Treasury
                           February 16, 2012
    Chairman Johnson, Ranking Member Shelby, and distinguished Members 
of the Committee, thank you for the opportunity to discuss recent 
developments in Europe and how we are engaging with our partners to 
limit risks to the U.S. economy.
Europe Is a Key Partner
    The United States has an enormous stake in the continued strength 
and stability of Europe. The Transatlantic partnership is an enduring 
source of economic and political stability and is a cornerstone of our 
international engagement and alliances.
    We are reminded daily of our unique partnership with Europe. The 
United States and EU are cooperating closely to increase pressure on 
Iran due to its noncompliance with international nuclear obligations. 
We welcomed Europe's decision to ban imports of Iranian oil and 
petroleum products, freeze the assets of the Iranian central bank, and 
take additional action against Iran's energy, financial, and transport 
sectors.
    In Afghanistan, the United States, the EU, and other European 
donors provide the majority of funding for stabilization, promotion of 
democratic governance, and transition to a sustainable economy.
    I am just back from leading a meeting in Abu Dhabi working closely 
with our European partners along with our partners in the Gulf and G8 
to support the Arab countries in transition as they work to deliver 
inclusive growth and opportunities for their young people.
U.S. Economic Stake
    Our economic stake in Europe is also immense. The United States has 
no bigger, no more important economic relationship than it does with 
Europe. A strong European economy--the second largest in the world--is 
essential to a strong global economy and a robust U.S. recovery. Our 
recovery has strengthened recently but remains vulnerable to events in 
Europe.
    The euro area is currently confronting difficult challenges of 
fiscal sustainability, of liquidity, and of structural imbalances. We 
believe Europe has the will and the capacity to manage these challenges 
effectively.
    Nonetheless, if the euro area were to experience a deterioration of 
financial conditions, this could pose important risks to our recovery.
    A further drop in growth within the euro area would reduce demand 
for U.S. products and services at a time when external demand is an 
important engine of our recovery. The euro area accounts for nearly 15 
percent of U.S. goods and services exports. It is the most significant 
foreign source of investment and jobs in America, accounting for fully 
40 percent of all FDI in the United States. By way of illustration, 
fully one third of South Carolina's exports and over one quarter of 
Alabama's exports are destined for Europe, with a particular emphasis 
on autos and auto exports. Exports to Europe represent 18 to 24 percent 
of merchandise exports from New York, North Carolina, and Illinois, 
accounting for hundreds of thousands of jobs that could be put at risk 
by a decline in European demand.
    As Chairman Bernanke noted in testimony, U.S. banks have made 
progress in protecting themselves against problems in European 
sovereign or bank debt. Our banks have built thicker capital cushions 
and better liquidity buffers since the crisis. In fact, the direct 
exposures of the U.S. financial system to the most vulnerable euro area 
program countries are quite modest. However, our banking system still 
has material exposure to the core of Europe and to the broader banking 
system, which could be impacted if financial stress were to broaden in 
Europe.
    Although we are in a better position to withstand financial stress 
and contagion, further deterioration in Europe could have a material 
adverse impact on our financial system. The globally connected nature 
of financial markets means that stress in European financial markets 
will be felt in the United States. Volatility in financial markets 
reduces risk appetite, undermines business and consumer confidence, and 
jeopardizes the availability of credit. That, in turn, can hurt 
American businesses and jobs, particularly in smaller firms that depend 
on credit from their banks to grow and innovate. It could also reduce 
the savings and wealth of American families.
The European Policy Response
    The leaders of the euro area face complicated challenges that will 
require sustained political will to address over time. Market 
participants have demonstrated concerns about a combination of slow 
growth, low competitiveness, and large debts in some countries, as well 
as a large and highly interconnected banking system. These in turn are 
symptoms of underlying gaps in the European Monetary Union's 
institutional framework.
    Over the course of the decade since the advent of the euro, 
substantial and persistent internal imbalances emerged within the euro 
area, with large balance of payments deficits in Spain, Portugal, 
Ireland, and Greece offsetting large surpluses in countries like 
Germany and the Netherlands. These reflected differences in 
competitiveness, as well as differences in fiscal policy. The internal 
imbalances were initially sustained by private capital flows, as 
private savers in the surplus countries financed deficits elsewhere in 
the euro area. However, in the past 2 years, private financing has 
retreated. Resolving these internal imbalances is a difficult feat 
within the confines of a monetary union where currency adjustment is 
not an option and fiscal integration has lagged far behind.
    The leaders of the euro area have pledged to do whatever it takes 
to stand behind the euro. And we have confidence the euro area has the 
capacity and the resources to stand behind that commitment. It is a 
common feature of financial crises that the pace of markets far 
outstrips that of political process. The challenge of delivering on 
European leaders' commitment has been magnified by the considerable 
time that is required to secure agreement among 17 heads of State and 
permit deliberation and approval by 17 national parliaments. Despite 
these challenges, Europe has made enormous strides.
    For our part, in addition to the actions we have taken domestically 
to strengthen the U.S. economy, we have been working strenuously to 
protect against elevated financial stress in Europe. Since the risks 
associated with Greece first became apparent in early 2010, the 
President and Secretary Geithner have worked tirelessly with their 
European partners, the IMF, and their G20 partners to underscore the 
gravity of the situation and the critical need to act quickly and with 
decisive force to restore confidence and combat contagion.
    The United States and our international partners stand with 
European leaders as they work to restore confidence in the foundation 
of the euro zone. We have consistently supported a comprehensive plan 
to decisively address the crisis with 4 key elements: reforms to 
address the root causes of the crisis; ensuring European banks have the 
liquidity and the capital cushions they need to maintain the full 
confidence of depositors and creditors; a powerful firewall to stem 
contagion and ensure sovereigns have access to affordable financing as 
they reform; and charting a sustainable path forward for Greece. Our 
European partners are making progress on these key elements.
    The first priority is reform: structural reform to restore 
competitiveness and growth, fiscal reform to restore sustainability of 
public finances, and repair and reform of the banking system. Italy and 
Spain have new leadership committed to restoring market confidence. In 
Italy, a country that ran primary surpluses for seventeen consecutive 
years preceding the financial crisis, the key challenge is to 
strengthen competitiveness and growth. After just a few months in 
office, Prime Minister Monti has is laying the groundwork for a more 
dynamic economy, with a first round of measures to liberalize the 
retail sector and create incentives for companies to increase 
investment and hire more women and youth. A second round, that includes 
liberalization of professions, transport, energy, and other sectors, 
has been submitted to parliament. Negotiations on labor reforms are 
ongoing.
    Likewise, Spanish President Mariano Rajoy is moving aggressively to 
address Spain's vulnerabilities, including by undertaking a historic 
restructuring of its financial sector, which has reduced the number of 
savings banks to 15 from 45 and improved their institutional governance 
and framework. Spain's Cabinet recently approved a draft bill that 
obliges all levels of Government to approve expenditure ceilings and 
debt targets, with fines for noncompliance, and introduces tougher 
monitoring of regions' fiscal situations.
    Each of these countries face an extremely challenging agenda and 
completion will require determined efforts over a sustained period of 
time.
    These efforts by individual countries are being reinforced across 
the euro area by broader economic governance reform. On December 9 of 
last year, Europe elaborated plans to strengthen the foundations of the 
euro area through a fiscal compact and stronger coordination of 
economic policies. Late last month, leaders from 25 of the 27 EU member 
States endorsed the agreement.
    Second, European monetary and banking authorities have taken steps 
to provide strong assurances that European banks will have access to 
liquidity and build strong capital buffers. In recent months, the 
European Central Bank (ECB) has taken critical actions, including 
lowering interest rates, providing liquidity to banks and buying 
sovereign bonds in the secondary market. Last December, in the face of 
deterioration in bank liquidity conditions and with frontloaded bank 
debt amortizations on the horizon, the ECB introduced the 3-year Long-
Term Refinancing Operation (LTRO) and announced broader eligibility for 
collateral, which seems to have significantly eased bank funding 
pressures and tensions in sovereign debt markets. Meanwhile, the 
European Banking Authority has undertaken an effort designed to 
significantly strengthen bank capital buffers.
    Discussions on a successor program to support Greek reform efforts 
are ongoing, as are discussions with private bondholders on a voluntary 
exchange. Since 2009, Greece has undertaken fiscal consolidation of 
approximately 5 percentage points of GDP. Greece has also implemented a 
reform of its pension system and a labor reform aimed at liberalizing 
wage negotiations and promoting more flexibility in employment schemes. 
But with a heavy debt burden and significant lack of competitiveness, 
Greece will need to sustain a challenging path of reforms for many 
years in order to restore growth and sustainability.
    Finally, it is critical that the euro area continue its efforts to 
build a strong firewall to stem contagion and to ensure that sovereigns 
undertaking difficult fiscal and structural reforms have access to 
financing at sustainable rates. In December, European leaders agreed to 
establish a permanent crisis resolution fund, the European 
Stabilization Mechanism (ESM), by June--a year ahead of schedule. And 
they committed to assess the adequacy of resources in their firewall at 
their next summit in March.
    The United States and our international partners stand with 
European leaders as they move to put in place a comprehensive solution. 
And we have welcomed the IMF's role in helping to contain the crisis 
and its impact on the U.S. recovery and global economy by providing 
advice and helping to design programs for the most vulnerable European 
countries, as well as providing a minority share of funding in certain 
circumstances. However, while the IMF should continue to play a 
constructive role in Europe, IMF resources cannot substitute for a 
strong and credible European firewall and response. The challenge 
Europe faces is within the capacity of the Europeans to manage and the 
Administration has been clear with our international partners that we 
are not seeking additional funding for the IMF.
    By promoting greater stability and safeguarding against further 
deterioration of economic conditions, the IMF supports the global 
economy, and with that, U.S. growth, jobs, and exports. The IMF has 
played, and can continue to play, an important role in the European 
crisis response. With its wealth of experience and independent 
judgment, the IMF sets strong economic conditions that help return 
countries to sustainability. In this regard, the IMF has unparalleled 
credibility providing external assessments of reform programs. And 
through our role on the IMF board as the largest shareholder, the U.S. 
plays an important role shaping the terms and policies of adjustment 
programs. It is in our national interest to retain that leading 
influence in the IMF. In 2009 rapid Congressional support for IMF 
action helped stabilize the global recovery and ensured continued U.S. 
leadership in the institution.
    The IMF has played this critical role in every major post-war 
financial crisis while consistently returning to the United States and 
other IMF members any resources--with interest--that it has temporarily 
drawn upon.
Conclusion
    Europe is an important partner and ally strategically and 
economically. The euro area crisis remains the foremost challenge to 
global growth, and to our domestic recovery. We will continue to 
actively engage with our European partners as they work to put in place 
a comprehensive solution to restore market confidence and ensure the 
health and resilience of the euro area. This is important to safeguard 
American jobs and protect our overall economic recovery.
                                 ______
                                 
                PREPARED STATEMENT OF ROBERT D. HORMATS
   Under Secretary for Economic Growth, Energy, and the Environment, 
                          Department of State
                           February 16, 2012
    Thank you Chairman Johnson and Ranking Member Shelby, for inviting 
me to testify today on the European debt crisis, and its implications 
for the United States and our relationship with Europe.
    When then-candidate Barack Obama spoke in Berlin in July 2008, he 
stated that one of the priorities of his presidency would be to 
reestablish strong transatlantic relations. Citing the daunting 
political, security and economic challenges of the 21st century, he 
stressed then that ``America has no better partner than Europe.''
    In the more than 3 years since, and despite discussion in the media 
about where Europe fits in the United States' global framework and 
speculation that Europe is turning inward as it deals with its domestic 
issues, the reality that President Obama articulated in Berlin has not 
changed. Europe is--and remains--America's partner of first resort and 
its staunchest ally. The strategic alignment between the United States 
and Europe, rooted in shared history and values, has never been closer 
in addressing both international threats and internal challenges.
    America, since the days of Presidents Truman and Eisenhower, and 
Secretaries Marshall, Acheson, and Dulles has recognized that a united 
and prosperous Europe is of enormous importance to the United States. 
And we have recognized, since the days of Jean Monnet and Robert 
Schuman, that closer economic integration in Europe was an essential 
underpinning to a stronger Europe and its ability to be a robust ally. 
And we understood that a prosperous Europe was important to a 
prosperous America. That was true in the 1950s when we supported the 
Marshall Plan, and it is today.
    In Libya, NATO allies came together with Arab and other partners to 
support the Libyan people and prevent a catastrophe. In Afghanistan, 
with nearly 40,000 European troops on the ground alongside our own, we 
have built and sustained NATO's largest-ever overseas deployments. And 
we will continue to support the Afghans as they assume full 
responsibility for their own security by the end of 2014.
    On Iran, along with our European allies, we share a deep and 
increasing concern about unresolved issues and Iran's continued refusal 
to comply with its international nuclear obligations. We remain 
committed to a dual-track policy that uses pressure to urge Iran to 
engage seriously on its nuclear program.
    And the strength of this alliance with Europe depends heavily on 
the health of our economies. The statement of the European Council on 
January 30, 2012, clearly points to a renewed focus on jobs and growth, 
which provides new opportunities for U.S.-EU trade, investment and 
science and technology cooperation for our mutual benefit.
    That is not to say that there are no differences across the 
Atlantic. But the reality is that we have essentially the same central 
objectives and are working on them together around the world.
    Today, I'd like to comment on this reality in two areas:
    First, our transatlantic work towards a common agenda of economic 
recovery and growth. This includes strengthening transatlantic trade 
and investment ties that reinforce our mutual recoveries, bringing 
emerging powers into the international rules-based system, and 
reorienting the global economic architecture for 21st century 
challenges; and
    Second, our work together in addressing the global challenges that 
confront us in Afghanistan, Iran, the Middle East and North Africa, and 
elsewhere.
Economic Recovery Through Trade and Job Creation
    Today's hearing is focused on the euro zone crisis--and for good 
reason. We have a huge stake in the health and vitality of Europe's 
economies. European growth is important both for the global economy and 
for creating and sustaining jobs in the United States.
    To put this in perspective, the value of United States goods and 
services exports to the European Union is about five times the value of 
our exports to China. Trade flows between the United States and the EU 
exceed $2.7 billion per day.
    In addition to the steps the EU has taken to resolve the debt and 
banking crisis, which Under Secretary Brainard has just discussed, we 
also have seen a commitment, as evidenced by the results of the EU 
Summit on January 30, to address the current economic challenges not 
only through fiscal consolidation, but also by facilitating job 
creation and putting in place measures to assist member States in 
finding a path back to economic growth.
    There is a lot more hard work ahead. And there are many difficult 
choices to make. But our European partners have laid a solid foundation 
on which to build, and we appreciate the enormous efforts the EU has 
taken to regain its economic footing.
    The Obama administration is committed to expanding and deepening 
our economic relationship with Europe. This will help both us and our 
European allies sharpen our competitive edge in the global economy, and 
achieve our domestic objectives for economic growth and job creation. 
Secretary Clinton has said, ``We need to forge an ambitious agenda for 
joint economic leadership with Europe that is every bit as compelling 
as our security cooperation around the world.'' I would like to outline 
for you how we at the State Department are working to expand trade and 
investment relations with Europe--in order to support jobs and growth 
on both sides of the Atlantic.
Transatlantic Economic Council and Regulatory Cooperation
    The business community, consumer organizations and other 
stakeholders in the United States and in Europe have also been an 
active and vocal constituency in support of the Transatlantic Economic 
Council, or TEC. The TEC, established in 2007 and led by the White 
House and the European Commission, engages our most senior economic 
policy makers in joint work to promote economic growth and job creation 
on both sides of the Atlantic--in particular by addressing regulatory 
barriers and fostering innovation.
    As tariffs have fallen in recent decades, nontariff measures or 
``behind the border'' barriers to trade and investment have come to 
pose the most significant obstacles to our trade. Regulators in both 
the EU and the United States aim essentially for the same strong 
protections for the health and safety of our citizens, for our 
environment, and for our financial systems.
    But differing approaches to regulation and to the development of 
standards can create barriers and slow the growth of trade and 
investment. Reducing unnecessary differences can create opportunities.
    One way we are seeking to minimize the impact of unnecessary 
regulatory divergences on trade and investment is to examine closely 
our respective regulatory processes, and to try to identify ways to 
make them more compatible and accessible. The TEC and the U.S.-EU High 
Level Regulatory Cooperation Forum, led by OMB, have spurred new 
discussion on our respective approaches to risk analysis, cost-benefit 
analysis, and the assessment of the impact of regulation on trade.
    Among other accomplishments, one of the highlights of the November 
2011 TEC meeting was arriving at a comprehensive work plan on electric 
vehicles and associated infrastructure, in cooperation with the U.S.-EU 
Energy Council, business, standard-setting bodies, and scientists on 
both sides of the Atlantic.
    A key component of this work plan is a decision to establish 
``interoperability centers'' or living laboratories, which will allow 
scientists from both sides of the Atlantic to share data, equipment, 
and testing methodologies. This in turn should set a foundation for 
compatible approaches and regulations in both markets and lead to 
interoperable e-cars and related infrastructure, such as charging 
stations and smart grids.
    While we have a common purpose on electric vehicles, success is by 
no means assured. It will depend heavily on the work that is done in 
the private sector to prioritize and develop the standards adopted for 
and applied to these new technologies. The standards-setting process is 
very complex with vital roles for Government, business, and standard-
setters.
    If the EU and the United States can together promote the creation 
of compatible, high quality, transatlantic standards in a variety of 
sectors or product areas in the short-to-medium term, our countries can 
encourage other nations to adhere to them and reduce the clutter of 
disjointed, unilateral standards that would impede trade and serve as 
protectionist devices.
    Businesses then will be able to deploy technologies more 
effectively and more quickly across the globe, where demand for these 
products will only grow over time, supporting our shared desire for new 
sources of jobs and growth.
    Additionally, common transatlantic approaches to regulation can 
serve as a model for other nations, in particular Russia, China, 
Brazil, and India. Together we can provide incentives for others to 
embrace science-based strategies and approaches, working toward 
regulatory convergence and enabling access to markets.
    This is an important point. Many countries don't share our 
regulatory principles and, through regulation, try to make our 
companies less competitive in their markets or even try to shut them 
out.
    The United States and the EU can both benefit if we work together 
to promote the adoption in third countries of market principles and 
internationally accepted rules governing trade, finance, intellectual 
property, and investment. Better economic policies in third countries 
will help ensure fair competition and market access, increasing 
opportunities to generate exports and jobs in the United States and 
Europe.
U.S.-EU High Level Working Group on Jobs and Growth
    At the U.S.-EU Summit in November 2011, President Obama and EU 
leaders pledged to make the U.S.-EU trade and investment relationship 
even stronger. They called upon the TEC to create a High Level Working 
Group on Jobs and Growth, cochaired by the U.S. Trade Representative 
Ron Kirk and EU Trade Commissioner Karel De Gucht.
    The purpose of this group is to identify and assess options for 
strengthening the transatlantic economic relationship in areas 
including, but not limited to: conventional barriers to trade in goods; 
barriers to trade in services and in investment; opportunities to 
reduce or prevent unnecessary nontariff barriers to trade; and enhanced 
cooperation on common concerns involving third countries.
    All options are on the table. USTR has had initial consultations 
with EU counterparts and is seeking input from all stakeholders, 
including Congress, as it begins its work. Several major private sector 
organizations have issued studies or reports that make compelling 
arguments for an ambitious agenda in this area.
Economic Statecraft
    In October 2011, Secretary Clinton announced her vision of Economic 
Statecraft as a central pillar of U.S. foreign policy. An important 
part of that is our economic relationship with Europe. That is, how we 
use the tools of diplomacy abroad to support trade and the rights of 
U.S. investors, leverage the strengths and expertise of the U.S. 
private sector in our economic engagement overseas, and use diplomacy 
and our overseas presence to grow our economy at home by attracting 
foreign investment to the United States.
    We have established an Economic Statecraft Task Force to elevate 
economic and commercial diplomacy goals and to ensure that we have the 
right people, support tools, and engagement platforms. The Task Force 
covers four principal areas of work: human capital, internal tools, 
external engagement, and policy opportunities.
    We are doing much of this work already, especially at our overseas 
posts, to support such programs as the National Export Initiative and 
Select USA, which promotes job-creating foreign investment in the 
United States. The State Department puts special emphasis on support 
for entrepreneurship. Under the Secretary's Economic Statecraft 
Initiative, we will scale up our efforts.
    Some successes from recent advocacy include: Volkswagen's recent $1 
billion manufacturing plant in Chattanooga, and Boeing's sale of 90 
aircraft to Russian airline companies in 2011. In April 2011, 
helicopter producer Sikorsky won a contract worth up to $1.3 billion, 
to coproduce utility helicopters in Turkey.
    Beyond advocacy for specific business deals, we are also working to 
level the playing field for U.S. workers and businesses in Europe and 
around the world, including in the agriculture sector. The volume of 
U.S. agricultural exports to the EU is strong and growing. Our 2011 
agricultural exports to the EU were valued at $9.5 billion, up 8.2 
percent from the previous year. USDA estimates that every $1 billion in 
U.S. agricultural exports supports about 8,400 American jobs across a 
variety of sectors. We at State want to help push those numbers even 
higher.
    Business is telling us there is more we can do to help them grow in 
an increasingly challenging world--and we at State want to exceed their 
expectations. On February 21-22, Secretary Clinton is inviting 200 
representatives of U.S. business support organizations and the private 
sector to participate in the Department's first ever Global Business 
Conference. This is part the Department's effort to increase engagement 
with the private sector and support U.S. business.
    We at State want to help push those numbers even higher. Business 
is telling us there is more we can do to help them grow in an 
increasingly challenging world--and we at State want to exceed their 
expectations. On February 21-22, Secretary Clinton is inviting 200 
representatives of U.S. business support organizations and the private 
sector to participate in the Department's first ever Global Business 
Conference. This is part the Department's effort to increase engagement 
with the private sector and support U.S. business.
Global Challenges
    We continue to work cooperatively with Europe to address the 
challenges that confront us both around the globe. Slower growth and 
tighter budgets in Europe could have an impact on some of our foreign 
policy objectives, but we are actively searching for more opportunities 
to leverage our individual and collective resources to advance our 
shared goals. Whatever happens on the financial and economic front, our 
foreign policy message has been consistent: It is important that 
transatlantic partners continue to dedicate resources to key 
priorities, and maintain critical deployments, both military and 
civilian. Reduced outlays overall should not mean reduced engagement in 
critical parts of the world.
    Europe is an indispensable partner in promoting peace and 
prosperity through development assistance. The EU and its member States 
account for over 55 percent of global net Official Development 
Assistance to developing countries, with aid from the fifteen 
wealthiest EU member States rising by 6.7 percent in 2010 to just over 
$70 billion.
    The EU and its member States have taken the lead on post-conflict 
aid operations in Liberia, Burundi, the Democratic Republic of the 
Congo, Sierra Leone, Darfur, and Chad. The EU has also taken on lead 
roles in the democratic transitions occurring in its own neighborhood, 
in Libya and Tunisia and other transition countries in the Middle East 
and North Africa region.
    Defense spending faces continued pressure in Europe. The Secretary 
of Defense told the Allies last fall that ``we are at a critical moment 
for our defense partnership.'' Overall, defense spending in Europe has 
decreased during the past decade, but Allies are committed to keeping 
NATO strong through collaborative capabilities acquisitions called 
``Smart Defense.''
    Despite tight budgets, NATO allies have a strong common interest in 
meeting our collective security obligations and building the 
capabilities needed to meet 21st century security challenges. At the 
May 2012 NATO summit, hosted by the United States in Chicago, Allies 
will consider opportunities to advance our efforts on such critical 
capabilities as missile defense; intelligence, surveillance, and 
reconnaissance; and assuring the right mix of nuclear and conventional 
forces.
    Our European allies have been critical to NATO's efforts in 
Afghanistan. While some feared a ``rush for the exits'' after NATO 
announced the goal of a 2014 transition to Afghan lead, in fact the 
Alliance has held together under the principle ``in together, out 
together.'' The Chicago Summit will shape the next phase of the 
transition of security responsibility to the Afghan National Security 
Forces.
    We continue to work closely with our partners in the P5+1 (the UNSC 
Perm 5, plus Germany) and the EU to engage Iran in serious discussions 
without preconditions regarding the international community's concerns 
about its nuclear program. As Iran has failed to show any serious sign 
of being ready or willing to engage, both the United States and the 
European Union have significantly increased our sanctions against the 
regime since the last round of UN sanctions in June 2010.
    We believe U.S. and EU sanctions are severely affecting the regime 
in Iran. We see no evidence that Europe's economic crisis has made 
European Governments less willing to impose vigorous sanctions; on the 
contrary, since 2011 EU member States have moved to expand dramatically 
measures against the regimes in Iran and Syria, including against their 
financial and energy sectors, and have maintained sanctions in other 
cases.
    Most recently, on January 23, the European Union took action to ban 
imports of Iranian crude oil and petroleum products, freeze the assets 
of the Iranian central bank, and take additional action against Iran's 
energy, financial, and transport sectors. These actions are consistent 
with the Iran sanctions in the National Defense Authorization Act of 
2012, on which we deeply appreciate the close engagement between the 
Administration and the Senate.
    We will continue to coordinate with our partners in Europe and 
around the world to increase sanctions pressure to sharpen the choice 
for the Iranian regime between continued violations of its 
international nuclear obligations and serious engagement with 
negotiations. Just last month, the EU announced a dramatic extension of 
its sanctions regime on Iran to include a ban on imports of crude oil 
from Iran, the lifeblood of the Iranian economy. The EU's new sanctions 
mirror the new sanctions recently passed by Congress and signed into 
law by President Obama on December 31, 2011.
    In Libya, we cooperated closely with our European allies to pass UN 
Security Council resolutions 1970 and 1973, which levied sanctions 
against the Qadhafi regime, established a no-fly zone and maritime 
embargo of Libya, and provided protection for citizens under attack by 
their own Government. This authorization allowed us, in coalition with 
Europe, to take down Libya's air defense system. We then handed the 
mission over to NATO, which quickly assumed command and control, and 
conducted a flexible and precise operation that saved tens of thousands 
of lives. This operation demonstrated that NATO remains the world's 
strongest political-military alliance, capable of bringing Allies and 
partners together under one command structure in a time of crisis. 
Since the end of the Libya operation, the EU and our European allies 
have remained committed to a successful transition in Libya, through 
development assistance and capacity building.
    The European Union and its member States have remained committed to 
a successful transition in Libya, through humanitarian and development 
assistance, as well as capacity building and technical training for the 
emerging Libyan Government.
    In Syria, the EU has joined us in steadily ratcheting up the 
pressure on the Asad regime, including through multiple rounds of 
sanctions targeting individuals responsible for abuses and institutions 
that fill the regime's coffers. The United States and the EU have 
together led efforts to call attention to Syria's human rights 
violations, cosponsoring three Special Sessions in the UN Human Rights 
Council, one of which resulted in the creation of an independent 
Commission of Inquiry tasked to document the atrocities of the Asad 
regime. America and Europe stand united alongside the Arab League in 
demanding an end to the bloodshed and a democratic future for Syria.
    Additionally, Germany, France, and the UK (E3) led efforts at the 
UN General Assembly in November 2011 by introducing a resolution, 
approved by an overwhelming majority, calling on Syria to fully comply 
the Arab League's initiative.
    And not resting on our laurels, we are engaging actively in the 
Middle East and North Africa to promote our shared values of democracy, 
especially in this time of transformational change. In the Middle East, 
we have a profound stake in this process. We are making the Deauville 
Partnership a priority during America's G8 Presidency this year. And to 
make good on its promise, we will be putting forward an ambitious 
agenda to promote political and economic reform, trade, investment, 
regional integration, and entrepreneurship to help people in the region 
realize the better future they have risked so much to have.
    And this work extends beyond the Middle East. We have to help 
consolidate democratic gains in places like Cote d'Ivoire and 
Kyrgyzstan, and support democratic openings in Burma, and wherever 
people lack their rights and freedom. America and Europe have more 
sophisticated tools than ever to support and reward those who take 
reforms, and to pressure those who do not.
    On Russia, Europe worked with both us and the Russians last year 
through the long and complicated process of negotiating Russia's 
accession to the WTO, completing the process after 18 years of 
negotiation. This painstaking work resulted in an invitation to Russia 
to accede to this global rules-based trading system. Russia's WTO 
accession was a key step in putting our relations with Russia on a more 
constructive course, which is one of President Obama's top priorities.
    Integrating Russia into the WTO has the potential to bring enormous 
benefits to U.S. manufacturers, farmers, and ranchers. While American 
exports to Russia rose 39 percent in 2011, more than twice as fast as 
our goods exports to the world as a whole, our exports to Russia, $8.2 
billion in 2011, represents only around one-half of one percent of our 
total exports.
    We should not underestimate the opportunity to expand U.S. exports 
further to a country of nearly 145 million people--the world's seventh 
largest economy. It's been estimated that Russia's WTO accession could 
result in a 20-percent increase in Russia's overall trade in 
manufactured goods, which could translate into a possible $2 billion 
increase in bilateral trade in manufactured goods with the United 
States. And the Commerce Department's International Trade 
Administration estimates that every billion dollars of U.S. exports 
supports over 5,000 jobs.
    President Obama in his most recent State of the Union Address urged 
Congress to ensure ``that no foreign company has an advantage over 
American manufacturing when it comes to accessing new markets like 
Russia.'' And to improve opportunities for U.S. companies in Russia 
going forward and support jobs here in the United States, we will need 
to secure the full benefits of the WTO deal for American business by 
terminating application of the Jackson-Vanik Amendment to Russia, and 
by extending permanent normal trade relations to Russia.
    Of course we have differences with Russia. Its recent veto of a 
tough UN resolution on Syria was--in the words of Secretary Clinton--a 
travesty. And the United States remains committed to strong, 
transparent support for civil society and democratic principles, as the 
Secretary demonstrated in the wake of the Russian parliamentary 
elections in December, when she voiced our concerns. But at the same 
time, we also have had unprecedented cooperation with Russia on Iran 
and North Korea. Russia has also agreed to greatly expanded use of its 
territory and airspace as supply lines to Afghanistan. And as indicated 
in our trade numbers, our economic ties are also expanding.
    The Jackson-Vanik Amendment--enacted vis-a-vis the former Soviet 
Union--long ago fulfilled its purpose with regard to Russia: to support 
free emigration, particularly Jewish emigration. No such barriers to 
emigration exist in Russia today.
    If Congress does not enact the necessary legislation to terminate 
Jackson-Vanik with regard to Russia, when Russia becomes a member of 
the WTO, the U.S. does not get all of the benefits of Russia's WTO 
membership, even though our competitors will. This puts many of our 
industries at a serious disadvantage. Unlike other WTO members, the 
United States will not be able to turn to the WTO mechanisms, including 
dispute settlement procedures, or ensure compliance on other areas such 
as intellectual property, services or WTO rules on antidumping.
    President Obama has established extending Permanent Normal Trade 
Relations to Russia and terminating application of Jackson-Vanik to 
Russia as a major priority. Congress can help level the playing field 
for U.S. businesses and workers by terminating application of Jackson-
Vanik to Russia before Russia joins the WTO this summer. Lifting 
Jackson-Vanik for Russia is about providing jobs and economic growth 
here in America.
Conclusion
    The transatlantic relationship is not just a defining achievement 
of more than half a century ago--it is indispensable to the world we 
continue to build together in the century ahead. Our predecessors 
planned for the future together. They acted on a belief that America, 
Europe, and like-minded nations everywhere are engaged in a single, 
common endeavor to build a more peaceful and prosperous and secure 
world. The world around us is changing fast, and America and Europe are 
charting our path forward together to deal with the challenges we face.
                                 ______
                                 
                 PREPARED STATEMENT OF STEVEN B. KAMIN
 Director of the Division of International Finance, Board of Governors 
                     of the Federal Reserve System
                           February 16, 2012
    Thank you, Chairman Johnson, Ranking Member Shelby, and Members of 
the Committee for inviting me today to talk about the economic 
situation in Europe and actions taken by the Federal Reserve in 
response to this situation.
    For 2 years now, developments in Europe have played a critical role 
in shaping the tenor of global financial markets. The combination of 
high debts, large deficits, and poor growth prospects in several 
European countries using the euro has raised concerns about their 
fiscal sustainability. Such concerns were initially focused on Greece 
but have since spread to a number of other euro area countries, leading 
to substantial increases in their sovereign borrowing costs. Pessimism 
about these countries' fiscal situation, in turn, has helped to 
undermine confidence in the strength of European financial 
institutions, increasing the institutions' borrowing costs and 
threatening to curtail their supply of credit. These developments have 
strained global financial markets and weighed on global economic 
activity.
    In the past several months, European leaders have taken a number of 
policy steps that have helped reduce financial market stresses. In 
early December, the European Central Bank, or ECB, reduced its policy 
interest rate, cut its reserve requirement, eased collateral rules for 
its lending, and, perhaps most important, began providing 3-year loans 
to banks. Additionally, European leaders announced and have started to 
implement proposals to strengthen fiscal rules and European fiscal 
coordination, as well as to expand the euro area financial backstop. 
These steps are positive developments and signify the commitment of 
European leaders to alleviate the crisis.
    Since early December, borrowing costs for several vulnerable 
European Governments have declined, funding pressures for European 
banks have eased, and the tone of investor sentiment has improved. 
However, financial markets remain under strain. Europe's authorities 
continue to face difficult challenges as they seek to stabilize their 
fiscal and financial situation, and it will be critical for them to 
follow through on their policy commitments in the months ahead.
    Here at home, the financial stresses in Europe are undoubtedly 
spilling over to the United States by restraining our exports, weighing 
on business and consumer confidence, and adding to pressures on U.S. 
financial markets and institutions. Of note, foreign financial 
institutions, especially those in Europe, continue to find it difficult 
to fund themselves in dollars. A great deal of trade and investment the 
world over is financed in dollars, so many foreign financial 
institutions have heavy borrowing needs in our currency. These 
institutions also borrow heavily in dollars because they are active in 
U.S. markets, purchasing Government and corporate securities and 
lending to households and firms. As concerns about the financial system 
in Europe mounted, many European banks faced a rise in the cost and a 
decline in the availability of dollar funding. Difficulty acquiring 
dollar funding by European and other financial institutions may 
ultimately make it harder and more costly for U.S. households and 
businesses to get loans. Moreover, these disruptions could spill over 
into the market for borrowing and lending in U.S. dollars more 
generally, raising the cost of funding for U.S. financial institutions. 
Although the breadth and size of all of these effects on the U.S. 
economy are difficult to gauge, it is clear that the situation in 
Europe poses a significant risk to U.S. economic activity and bears 
close watching.
Swap Lines With Other Central Banks
    To address these potential risks to the United States, as described 
in an announcement on November 30, the Federal Reserve agreed with the 
European Central Bank (ECB) and the central banks of Canada, Japan, 
Switzerland, and the United Kingdom to revise, extend, and expand its 
swap lines with these institutions. \1\ The measures were taken to ease 
strains in global financial markets, which, if left unchecked, could 
significantly impair the supply of credit to households and businesses 
in the United States and impede our economic recovery. Thus far, such 
strains have been particularly evident in Europe, and these actions 
were designed to help prevent them from spilling over to the U.S. 
economy.
---------------------------------------------------------------------------
     \1\ See, Board of Governors of the Federal Reserve System (2011), 
``Coordinated Central Bank Action To Address Pressures in Global Money 
Markets'', press release, November 30, www.federalreserve.gov/
newsevents/press/monetary/20111130a.htm. Similar announcements appeared 
on the Web sites of the other participating central banks.
---------------------------------------------------------------------------
    Three steps were described in the November 30 announcement. First, 
we reduced the pricing of drawings on the dollar liquidity swap lines. 
The previous pricing had been at a spread of 100 basis points over the 
overnight index swap rate. \2\ We reduced that spread to 50 basis 
points. The lower cost to the ECB and other foreign central banks 
enabled them to reduce the cost of the dollar loans they provide to 
financial institutions in their jurisdictions. Reducing these costs has 
helped alleviate pressures in U.S. money markets generated by foreign 
financial institutions, strengthen the liquidity positions of European 
and other foreign institutions, and boost confidence at a time of 
considerable strain in international financial markets. Through all of 
these channels, the action should help support the continued supply of 
credit to U.S. households and businesses.
---------------------------------------------------------------------------
     \2\ The dollar overnight index swap rate is the fixed rate that 
one party agrees to pay in exchange for the average of the overnight 
Federal funds rates over the life of the swap. As such, it is a measure 
of the average Federal funds rate expected over the term of the swap.
---------------------------------------------------------------------------
    Second, we extended the authorization for these lines through 
February 1, 2013. The previous authorization had been through August 1, 
2012. This extension demonstrated that central banks are prepared to 
work together for a sustained period, if needed, to support global 
liquidity conditions.
    Third, we agreed to establish, as a precautionary measure, swap 
lines in the currencies of the other central banks participating in the 
announcement. (The Federal Reserve had established similar lines in 
April 2009, but they were not drawn upon and were allowed to expire in 
February 2010.) These lines would permit the Federal Reserve, if 
needed, to provide euros, Canadian dollars, Japanese yen, Swiss francs, 
or British pounds to U.S. financial institutions on a secured basis, 
much as the foreign central banks provide dollars to institutions in 
their jurisdictions now. U.S. financial institutions are not 
experiencing any foreign currency liquidity pressures at present, but 
we judged it prudent to make arrangements to offer such liquidity 
should the need arise in the future.
    I would like to emphasize that information on the swap lines is 
fully disclosed on the Federal Reserve's Web site--through our weekly 
balance sheet release and other materials--and information on swap 
transactions each week is provided on the Web site of the Federal 
Reserve Bank of New York. \3\
---------------------------------------------------------------------------
     \3\ For the outstanding amount of dollar funding through the swap 
lines as it appears each week in the Federal Reserve balance sheet, 
see, www.federalreserve.gov/releases/h41. For other relevant 
information and materials on the Federal Reserve's Web site, see, 
www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm. For 
weekly information on the Federal Reserve's swap transactions with 
other central banks, see, www.newyorkfed.org/markets/fxswap/fxswap.cfm. 
Finally, for copies of the agreements between the Federal Reserve and 
other central banks, as well as other information, see, 
www.newyorkfed.org/markets/liquidity_swap.html.
---------------------------------------------------------------------------
    I also want to underscore that these swap agreements are safe from 
the perspective of the Federal Reserve and the U.S. taxpayer, for five 
main reasons:

    First, the swap transactions themselves present no exchange 
        rate or interest rate risk to the Fed. Because the terms of 
        each drawing and repayment are set at the time that the draw is 
        initiated, fluctuations in exchange rates and interest rates 
        that may occur while the swap funds are outstanding do not 
        alter the amounts eventually to be repaid.

    Second, each drawing on the swap line must be approved by 
        the Federal Reserve, which provides the Federal Reserve with 
        control over use of the facility by the foreign central banks.

    Third, the foreign currency held by the Federal Reserve 
        during the term of the swap provides added security.

    Fourth, our counterparties in these swap agreements are the 
        foreign central banks. In turn, it is they who lend the dollars 
        they draw from the swap lines to private institutions in their 
        own jurisdictions. The foreign central banks assume the credit 
        risk associated with lending to these institutions. The Federal 
        Reserve has had long and close relationships with these central 
        banks, and our interactions with them over the years have 
        provided a track record that justifies a high degree of trust 
        and cooperation.

    Finally, the short tenor of the swap drawings, which have 
        maturities of at most 3 months, also offers some protection in 
        that positions could be wound down relatively quickly were it 
        judged appropriate to do so.

    The Federal Reserve has not lost a penny on any of the swap line 
transactions since these lines were established in 2007, even during 
the most intense period of activity at the end of 2008. Moreover, at 
the maturity of each swap transaction, the Federal Reserve receives the 
dollars it provided plus a fee. These fees add to overall earnings on 
Federal Reserve operations, thereby increasing the amount the Federal 
Reserve remits to taxpayers.
Conclusion
    The changes in swap arrangements that I have discussed have had 
some positive effects on dollar funding markets. Since the announcement 
of the changes at the end of November, the outstanding amount of dollar 
funding through the swap lines has increased substantially, to more 
than $100 billion, and several measures of the cost of dollar funding 
have declined.
    That being said, many financial institutions, especially those from 
Europe, continue to find it difficult and costly to acquire dollar 
funding, in large part because investors remain uncertain about 
Europe's economic and financial prospects. Ultimately, the easing of 
strains in U.S. and global financial markets will require concerted 
action on the part of European authorities as they follow through on 
their announced plans to address their fiscal and financial 
difficulties. The situation in Europe is continuously evolving. Thus, 
we are closely monitoring events in the region and their spillovers to 
the U.S. economy and financial system.
    Thank you again for inviting me to appear before you today. I would 
be happy to answer any questions you may have.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WICKER
                     FROM ROBERT D. HORMATS

Q.1. Do you believe part of the reason why Greece became 
insolvent is because they had unrealistic and unbalanced 
entitlement programs? What can the U.S. learn from Greece's 
mistakes?

A.1. Greece presents a unique case, even within the broader 
euro zone crisis. Greece's low growth rate, structural 
weaknesses, and high debt and deficits have been issues for 
some time. For that reason, the Greek Government is embarked on 
a path of very challenging fiscal and structural reforms to 
restore competitiveness with the technical and financial 
support of its euro zone partners and the IMF. The reforms to 
fix these problems are complex and will take time, a key reason 
the U.S. has consistently advocated for a strong European 
firewall to ensure access to affordable financing as Greece and 
other euro area Governments implement reforms.

Q.2. What insight do the problems in Europe give you regarding 
some of the structural problems we have here in the United 
States? For example, with respect to our ballooning budget 
deficit and Federal Reserve balance sheets while the economy 
underperforms relative to the resources that have been applied 
to fix it.

A.2. It is essential that European leaders persevere in 
addressing the long-term challenge of reinforcing and expanding 
the institutions of its economic and monetary union. Even with 
our close economic ties, it is difficult to compare the unique 
policy challenges facing Europe's monetary union with the U.S. 
economy.
    For perspective on the U.S. Federal budget we defer to the 
U.S. Treasury.
    As an independent central bank directly under Congressional 
oversight, the Federal Reserve is best placed to answer 
questions about its balance sheet and responsibilities.

Q.3. Outside Greece, what contingency plans are in place to 
protect the United States banking system in the event of a 
string of threatened European defaults?

A.3. The Treasury and Fed as regulators and overseers of the 
U.S. banking system respectively are best placed to answer this 
question.
    Throughout the crisis, the United States has urged European 
Governments to act decisively and conclusively to resolve the 
debt crisis. Over the last 2 years, we have offered our 
perspectives on the dangers that the sovereign debt crisis pose 
to global economic recovery, and we have tried to share the 
lessons of our own financial crisis about the importance of 
responding to market challenges decisively and proportionately.

Q.4. Given the brinkmanship taking place with regard to 
Greece's upcoming funding needs, it cannot be taken for granted 
they get a bailout.

    If Greece does go bankrupt or withdraws from the 
        euro, how would that influence U.S. policy with respect 
        to liquidity for European banks via joint agreements 
        between the Federal Reserve and European Central Bank 
        and with regard to IMF policy efforts?

    What policy changes would be necessary in the event 
        of such a major failure of U.S. supported efforts?

A.4. Following last week's successful debt exchange, based on 
the concept of Private Sector Involvement (PSI), euro area 
member States formally approved the second support program of 
=130 billion for Greece. Member States have also authorized the 
European Financial Stability Facility to release the first 
installment of the program for a total amount of =39.4 billion, 
to be disbursed in several tranches. This second ``bailout'' 
program constitutes an opportunity for Greece to demonstrate 
strong commitment to debt reduction and reform, and to keep up 
the implementation momentum by rigorously pursuing the 
adjustment effort in the areas of fiscal consolidation, 
structural transformations, and privatization, strictly in line 
with the new program. Adherence to this program should allow 
the Greek economy to return to a sustainable path, which is in 
the interest of all nations.
    For its part of the second support program the IMF Board of 
Directors voted on March 15, at Greece's request, to replace 
its existing Stand-By Agreement (SBA) with a 4-year Extended 
Arrangement for Greece.

Q.5. Austerity without growth is a recipe for depression. What 
policies would you recommend to promote the growth side of the 
debt reduction equation once some equilibrium is reached?

A.5. As part of the second financial support program for 
Greece, European policy makers are now working to fix systemic 
structural issues and address the lack of competitiveness. The 
EU is currently in the process of laying out a plan for growth 
that focuses on employment, productivity, and social reforms.
    Going forward, policy makers in the euro area will be 
challenged to achieve a pragmatic balance between promoting 
fiscal consolidation, as mandated within the euro zone by the 
fiscal compact arrangement, and supporting growth. To be sure, 
countries must demonstrate continued resolve on fiscal and 
structural reforms. The United States has consistently 
advocated progrowth, promarket policies in Europe.

```