Bernanke Said to Tell Senators Euro Aid No Panacea (Update1)

May 11 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke told U.S. senators today that the euro region’s almost $1 trillion aid package to stem its debt crisis isn’t a cure- all, according to a participant.

“He said, ‘This is basically not a panacea,’” and that the measures are “temporary,” Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, told reporters in Washington after a closed-door briefing Bernanke held with the panel. “There’s got to be fundamental underlying changes in their economies, not just Greece, but a lot of other countries,” Shelby cited Bernanke as saying.

On May 9, European policy makers announced a loan package worth almost $1 trillion to prevent a sovereign-debt crisis and muffle speculation that Europe’s Economic and Monetary Union could break apart with countries abandoning the euro. The Fed reopened currency swaps with the European Central Bank, Bank of England, Swiss central bank and Bank of Japan.

“Clearly, there are a lot of problems that exist between now over the next two to three years as to whether or not these economies can take the necessary steps to put themselves in better fiscal shape,” Senator Christopher Dodd, the Connecticut Democrat who chairs the banking panel, told reporters when asked about the Bernanke briefing.

Swap Audits

The currency swaps would be subject to a congressional audit under an amendment adopted by the Senate today on financial legislation. The chamber voted 96-0 for the proposal offered by Senator Bernard Sanders, a Vermont independent, to allow the Government Accountability Office to conduct a one-time audit of every Fed emergency action since December 2007.

In a swap, central banks exchange foreign currency with an agreement to reverse the transaction at a later date. The central banks will then lend dollars at fixed rates to firms in their countries. The Fed said yesterday that the swaps pose no risk because the contracts are with central banks, not the foreign institutions that borrow the funds, and the other countries will return the dollars at the same exchange rate.

Dodd said he’s “satisfied” with Bernanke’s remarks during the briefing that the U.S. is “well-protected” from losses on the currency swaps.

“The central bank of Europe is about as safe a place as you can have a swap with,” Dodd said after the briefing. “Providing swaps, euros for dollars, does not expose our country.”

Weekly Updates

The Fed plans to release details of the swaps contracts soon and will provide weekly updates on the program, a move Dodd applauded as a “major step.”

The volume of swaps surged following the bankruptcy of Lehman Brothers Holdings Inc. and peaked at $583.1 billion in December 2008. The volume of swaps declined throughout 2009, and the lines were closed in February, along with other Fed emergency-lending programs.

“We’re looking for ways to be even more transparent around this round of swaps than we were before,” Richmond Fed President Jeffrey Lacker said to reporters today in Greensboro, North Carolina.

The challenge stemming from debt-laden governments in Europe probably poses the main risk to U.S. growth, Lacker said, responding to audience questions after a speech. “It’s not clear that it’s going to have any effect at all so far, but it has the potential to, in broad terms,” he said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Alison Vekshin in Washington at avekshin@bloomberg.net.