By Steven C. Johnson
NEW YORK (Reuters) - St. Louis Fed President James Bullard on Thursday welcomed central bank efforts to make dollar loans to European banks cheaper but warned against expecting a quick fix to the continent's debt crisis.
"I do not think you should expect the crisis to be solved with a silver bullet, so that expectation should leave the market," Bullard said at the Bloomberg Hedge Funds Summit.
The Fed and five other major central banks acted this week to contain the crisis by lowering what they charge commercial banks for short-term dollar loans, known as liquidity swaps.
The move recalled coordinated central bank efforts from 2007 to 2009, including those designed to help banks cope with the collapse of Lehman Brothers.
Bullard said efforts then were vital in preventing an even bigger global banking crisis, adding that "to the extent that we are possibly coming into something like that, it makes sense to bolster our position there."
But he stressed that he expected neither a one-off solution to the European debt crisis nor a euro zone collapse. Instead, he predicted it would take a long time for heavily indebted countries to tighten their belts and return to fiscal health.
"You should put the focus squarely on those countries and those politicians that have borrowed way too much," he said.
Stock markets and the euro initially rallied on the coordinated central bank operation. Worries about Europe's debt crisis and possible losses at banks that have lent money to troubled euro zone governments have made it harder for those banks to secure dollar funding in the market.
Countries with large debt burdens such as Italy and Spain have had to pay sharply higher rates in recent weeks to borrow money. Markets fear those funding costs are not sustainable.
Eventually, Bullard said the United States would also have to make serious efforts to rein in a budget deficit currently running at nearly 10 percent of gross domestic product.
"I've said many times, Europe is a complete wake-up call for the U.S. fiscal situation," Bullard said. "You're talking about economies previously considered AAA having tremendous trouble borrowing on international markets. Our day will come if we do not address this issue."
Political wrangling over how to reduce the U.S. budget deficit over the summer prompted Standard & Poor's to strip the United States of its top-notch AAA rating, though Europe's woes have so far sustained demand for U.S. Treasuries.
"CAUTIOUSLY OPTIMISTIC" ABOUT U.S. ECONOMY
Though he admitted Europe's problems were increasing market uncertainty, Bullard said he was "cautiously optimistic" about the U.S. outlook, noting that fears of a new recession this year have receded.
Growth in 2012, he added, may be even stronger, "provided we can get past the European situation without a global macroeconomic shock."
If not, he said the Fed could revisit some of the emergency liquidity operations it employed in 2008-2009, including making it easier for banks to borrow at the Fed's "discount window."
"We could reopen those if the situation got more dire and we thought some bigger institutions were having trouble," he said.
The Fed closed most of its emergency liquidity operations in 2010 but has pledged to hold benchmark interest rates at record lows near zero until mid-2013 to help boost growth.
Bullard said rates would stay low "for a good long time until we can get as much recovery as we can while certainly keeping an eye on inflation."
But he said fixing the 2013 date has caused "headaches" for the Fed, adding "I don't think you should make monetary policy according to the calendar, you should make it according to the state of the economy."
(Additional reporting by Mark Felsenthal in Washington, DC; Editing by Andrea Ricci and James Dalgleish)