European governments have a long way to go in improving their fiscal positions and solving a spreading sovereign debt crisis, said Boston Federal Reserve Bank President Eric Rosengren.
The euro zone's spreading sovereign debt crisis has spooked investors and rocked a world economy that is still recovering from the private-sector debt crisis of 2008 and 2009.
They need to get their fiscal house more in order and there already are movements towards having more fiscal discipline among all the various countries in Europe, Rosengren told the Massachusetts Investor Conference on Friday. There's progress in that direction but they have a long way to go yet.
European financial regulators also need to aggressively address the fact that many of their large banks are undercapitalized, Rosengren said, adding that is a particular concern for the continent given that many of its largest banks represent a much greater share of their home nations' gross domestic product than is the case in the United States.
Many of their banks are still paying dividends, Rosengren said. If it were up to me, I wouldn't be paying dividends on large banks that are having financial difficulties.
European finance regulators should consider putting their banks through stress tests, similar to the exercise U.S. regulators ran during the last financial crisis, in which banks had to demonstrate how they would perform in theoretical downturns of varying severity.
Europe's crisis has already rocked Franco-German bank Dexia, which is on financial life support while it waits for Belgium, France and Luxembourg to finalize details of a guarantee package promised in October.
Volatile bank-stock prices show that investors are still worried about how well the finance sector will weather Europe's turmoil, Rosengren said. The KBW Bank Index of U.S. banks, for instance, is down some 30 percent from its year high, hit in February, and the STOXX euro zone bank index has soared 17 percent since hitting a near three-year low last Friday.
Given the movement in the stock prices we have to be very concerned about the financial sector, primarily in Europe but also to some degree in the United States, Rosengren said.
CENBANKS INTERVENTION 'SUCCESSFUL'
The Federal Reserve and European Central Bank, along with their counterparts in Canada, Britain, Japan and Switzerland on Wednesday said they would lower the cost of dollar-swap lines starting next week. The move, aimed at keeping credit markets from seizing up due to fears related to the European sovereign debt crisis, triggered a sharp rally in world stocks.
That operation, I would think, has been quite successful in changing people's perception about the pressures that were going to be occurring in the euro-dollar market, Rosengren said.
Rosengren, one of the Fed's most dovish members, will next be a voter on the policy-setting Federal Open Market Committee in 2013.
(Reporting by Scott Malone in Boston, Editing by Chizu Nomiyama)