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Euro Failure Would Make Lehman Look Like Picnic, Clarida Says

Richard Clarida, global strategic adviser at Pacific Investment Management Co., comments on Europe’s sovereign-debt crisis and what role the European Central Bank may play. He spoke today with Sara Eisen on Bloomberg Television’s “InsideTrack.”

On worst- and best-case scenarios for Europe:

“The worst-case scenario for Europe is a run of bank failures, collapsing confidence in sovereigns, the inability of Italians to roll over their debt and potentially the end of the euro -- which, if it were to happen, would make Lehman Brothers look like a picnic.”

“The best-case scenario is a big agreement in substance that gets the ECB engaged and restores confidence to the markets.”

On possible ECB role:

“A credible move by a central bank that is willing to backstop it with its balance sheet can have a big impact.”

The International Monetary Fund “doesn’t have a big enough balance sheet. The IMF could maybe lend $300 or $400 billion. But we are talking about a number over a trillion.”

“The challenge with fiscal union is that it will take two to three years. They have to change treaties. They have to get 27 parliaments to ratify this. The near-term problem is both liquidity of sovereigns as well as solvency, and now it’s in the banking system. So that’s why people are looking at the ECB. They have the one balance sheet that could be deployed in size, like the Fed did.”

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