Richard Berner at Morgan Stanley explains that while a European sovereign debt crisis would likely slow European economic growth substantially, and weaken the Euro, the U.S. would be relatively unscathed.
That’s because, relative to the entire global economy, America’s linkages to Europe aren’t actually that large. This is especially the case in terms of U.S. bank assets:
Richard Berner @ Morgan Stanley:
Limited spillover to the US: We estimate that a 1pp slowdown in European growth might shave 0.2% from that in the US. Three channels matter: exports, earnings and financial linkages. Europe accounts for about 29% of US exports, 8% of S&P revenues and 4.6% of US banks’ total assets.
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Contagion tail risk: Contagion spreading from the European banking system is the biggest tail risk. If the crisis spills over into broader risk-aversion and a drying up of liquidity – the functional equivalent of the US subprime crisis – we believe that the consequences could be more dire.
We believe the greater threat is probably in regards to sentiment. A major European crisis would increase risk aversion globally. Oddly enough, this would most likely mean a flight of capital into the U.S..
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(Via Morgan Stanley, US: A European Slowdown Would Only Nick The U.S., Richard Berner, 17 Feb 2010)