The European debt crisis gripping the eurozone poses an even more “ominous” financial threat than the impact of collapse of Lehman Brothers three years ago, former US Treasury Secretary Larry Summers said yesterday.
In an interview with Emerging Markets he said he believed the resources that policymakers had made available to tackle the crisis were “insufficient” and would have to be increased, hinting that Italy and Spain might be next to need support.
Asked whether last week’s market turmoil was a sign of an imminent global crisis, he said: “I’ve been coming to these meetings for 20 years [and] there has not been a time when the situation was more ominous than the current situation.”
This would make the current crisis even more severe than 2008, when the failure of Lehman triggered a global recession, and the collapse of the hedge fund Long Term Capital Management in 1998 that forced the New York Federal Reserve to coordinate a bailout by leading Wall Street banks.
However he played down comparisons with the Great Depression of the 1930s as “melodramatic”. “I think it’s important to recognize the gravity of the situation, but important not to succumb to self-fulfilling prophecies of apocalypse.”
Summers said that the final outcome for the global economy and financial system would depend on the decisions taken both by governments and companies in the coming months.
He appeared to criticize efforts by eurozone leaders to bring the crisis in Greece and other peripheral economies as “incrementalist”.
“Actions are taken only when they are forced and the actions taken are the minimum necessary to avert imminent catastrophe but are not of significant magnitude to prevent the occurrence of problems,” he said.
He also dismissed the importance of the communiqué issued by the IMF’s International and Financial Committee (IMFC) yesterday that pledged to use its global role to support the eurozone’s leaders’ efforts.
“I don’t think the words ‘strongly support’ by the IMFC are independently likely to be regarded by market participants as being of great significance,” he said.
He said that it was vital that European leaders “put to rest” the doubts about the health of the continent’s banking system.
And in a comment that will be seen as referring to Italy and Spain, which between them hold some E2.5 trillion of debt, he said: “It is also clear that some of the larger sovereigns that have become implicated in the crisis recently will need to be addressed.
“The current resources available to support stability are insufficient and these commitments will need to be escalated,” he said.
His remarks echo the warning by Nouriel Roubini in an exclusive interview with Emerging Markets that Europe would have to triple or quadruple the size of the E440 billion European Financial Stability Facility (EFSF), to prevent Italy and Spain becoming “toast”.
Summers, one of the authors of the 2009 stimulus package, said the priority for the Obama administration should be to spur short-term demand, and to focus on long-term reform of the US fiscal deficit.
“My read of the situation is that in the United States the problem is predominantly lack of demand and that appropriately designed programmes of fiscal stimulus do raise demand, that the impact is to create a virtuous circle in which increased employment leads to increased income, leads to increased employment.”