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Analysis: Memories of 2008 drive U.S. pressure on Europe crisis

Sep 25, 2011, 1:44 p.m.
A shadow is cast on a board showing stock market prices inside a brokerage in Taipei September 6, 2011. REUTERS/Pichi Chuang

Another key avenue by which the U.S. economy could get hit is the banking system and a sharp pull back in credit markets.

The conventional wisdom among bankers is that U.S. financial firms could weather a widening crisis because they have little exposure to European debt and stronger capital cushions than in 2008.

Indeed, Citigroup Chairman Vikram Pandit said on Friday banks' exposure to Europe was "extremely manageable," and the bigger risk would be a "demand shock" to the U.S. economy in which shell-shocked businesses and consumers retrench.

But analysts say a severe market seizure could quickly put funding pressures on weaker U.S. institutions, particularly those with ties to European banks.

"At the time of the Lehman collapse, Europe also was thought to be insulated from that crisis, but obviously that was a mistake," said an executive at a major U.S. investment bank.

Academic research shows grim metrics from recessions brought on by financial collapse.

A 2009 study of post-World War Two financial crises by Harvard University economist Kenneth Rogoff and University of Maryland's Carmen Reinhart found that unemployment rates spike an average of 7 percentage points over the down phase of the cycle, which lasts on average more than four years.

At the same time, they found real GDP per capita falls an average of 9 percent from peak to trough, a process that takes two years. Real housing prices tend to decline 35 percent over six years and equity prices fall 55 percent over 3.5 years.

"Europe is already hurting U.S. growth," said Troy Davig, senior U.S. economist at Barclays Capital. "When you combine Europe with the debt ceiling debate, the U.S. downgrade and stock market declines, confidence is at historic lows. This is not an environment in which firms want to hire people."

(Additional reporting by Philipp Halstrick; Editing by Neil Stempleman)

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