. lastly, and judging by the 2008 and nine experience with currency swaps, the dollar swap lines could reach $600 billion in the event the crisis were to intensify. what must pose that the risk would be circumscribed by the fact that the main counterplot to those -- counterpart would be swapped. they could print the year rose to buy the dollars to repay those loans. thank you. >> thank you. >> members of the subcommittee, thank you for inviting me to testify. the eurozone is teetering on collapse. because of the problem is excessive government spending and leading to excessive

government debt coupled with slowed gdp growth. the largest european countries are expected to have gdp growth at 1.3% for 2012. the imf has also produced a long-term real gdp forecast in which they have discovered most of the european zone will have less than 2% gdp growth by 2016. if we take a book at the household and financial debts in europe, we find that the u.k.'s debt to gdp ratio including household and finances is over 900%. japan is over 600%. the u.s. is over 300%. they are drowning in debt. a recent article from economist at the european central bank says that there is a stick of

again-up that of the size of government on growth. the european union will unify a break up or downsize regardless without spending too much money and taking on too much debt to reduce the ability to pay for it was slow gdp growth. additional debt is not the answer. it is the problem. the other solution is austerity. making loans to the central bank does not solve the underlying structural problem. it only makes the debt to gdp problem worse. it is a short-term solution for worsening gdp growth. if germany and france are successful in creating a fiscally integrated europe, there will be less of a rush to purchase u.s. treasurys. given that the fed is already

the purchaser of u.s. treasuries, this could be a problem. u.k. and japan continue to increase their purchases. the u.k. and japan are not enough to pick up the slack of china purchases. the fed has been active in european bailout starting in 2007. it pete in 2008. the largest european borrower was the failed one. we are still in the dark on the guarantees. the ecb drew $552 million from the fed. in november, there's an interest rate of 1.08%. the fed also bar the same amount in prior week. how long will they keep the swap line opened? well the cannot see it in real

time, the evidence indicates a basic swap has a very short half light. it is able to drive down in great momentarily. this is ineffective. a recent disagreement was an immediate between the fed market magazine, it the bloomberg market said they had 7.7 trillion. that is almost the size of our national debt at one point recently. the fed disagreed and said it was never more than $1.50 trillion. whatever we're looking at, it will impact these large numbers. the fed is attempting to bail out of the eurozone. on the fed side, it is clear that the guarantees will be

problematic. i do not see the story for improvement. it is difficult to mayor -- measure taxpayer exposure. the imf is also active. they have a line of credit for the crisis funding in the amount of $100 billion. there is little likelihood that deal continue to have problems. the arizona structural problems cannot be solved by look interest-rate guarantees from the fed. it could actually jeopardize u.s. taxpayers and is a perverse solution of the problem. the best way to protect this is

to increase transparency to the fed. the under state spending cuts themselves in order to reduce the deficit. thank you. >> thank you. let me add my own thanks to you. thank you for inviting me here today. i and economic steadier at the brookings institution. i am not representing the institution which is not a policy divisions. i commend you. the euro crisis is deeply worrying. there is significant chance that the crisis could go badly enough that your plunges into a deep recession that puts the u.s. into a mild recession. they will communicate itself to our shores strong way. we have $400 billion of exports to europe annually. $1 trillion of direct

investments and our banks have almost $5 trillion. the good news is that the eurozone as a whole does have the resources to avoid that kind of disaster if the 17 nations together. europe is one of the world's largest economies. the eurozone as a whole has a debt ratio similar to the u.s. spirits the situation can be remedied. i personally believe there is a three in four chance that europe will muddle through. political constraint leave us with a one in four chance of disaster. the crisis is likely to get worse before it gets better. ito probably take the imminent possibility of this to allow politicians to break through.

it may be necessary for them to create a comprehensive package backed by $2 trillion euro. not all of them have been used in practice. they need to know there is insurance for the emergency. they are unlikely to go back and supply some of the funds themselves. i believe the imf could play a very useful role in comprehensive solution. adding some imf funding to the mix would help reassure financial markets that the total resources necessary would be available. it would be a clear sign that the rest of the world stands ready to help europe for its troubles which it also be viewed positively by the markets. most importantly, at the imf is in the best position to impose conditions on lending troubled

eurozone countries. it is viewed as more dispassionate and less political about your situation. that would be true for a purely european institutions. it can provide a great deal of technical advice which is more likely to be taken when the imf is also a provider of funding. we all listen more carefully to those for providing money to us. if europe produces a credible comprehensive plan that involves the imf appropriately, we should support that imf role. i do not believe that this would require additional u.s. funding of the imf but just the use of resources we have already provided. the imf has almost $400 billion of uncommitted resources. europe is planning to commit another 200 billion heroes to the imf with the possibility of some matching funds from certain non-european nations not including the u.s.. the risk to the taxpayer from

imf lending would be small for a variety of reasons. the key one is that imf lending is and a legally privileged position that makes it much safer than the t.a.r.p. funds that were invested by u.s. taxpayers. imf loans are effectively senior in claims to all of their borrowing. the t.a.r.p. funds were deliberately invested at the level of equity which is much riskier. this was done in order to stabilize the financial markets by protecting other suppliers of funds. in edition, even if everything does go wrong, the u.s. there's less than 1/bit of the risk. -- bears 1/5 of the risk. our citizens are already at great risk. if it goes wrong, our citizens and the businesses they ellen will lose large sums of money. federal government will fall

significantly, aventurine requiring taxpayers to pay more than they otherwise would have done. supporting imf intervention would reduce the total rest of america by much more than the quite modest financial risk that our shy of the imf funding would represent. sometimes the riskiest choice is to take no chances at all. there are a few things american can do along the line of the fed swap facilities and the provision of technical advice. this is the european problem. they will need to provide the backbone. thank you for the opportunity to testify. i welcome any questions. >> thank you. thank you members of the subcommittee for inviting me to testify. to fully assess the rest to the united states in a proper role,

it must first be clear what the crisis is and is not. it is not a bailout of population for the weaker european economies. the populations of those countries are being forced to give up portions of their sovereignty in name of austerity toward fiscal union. it is partially a bailout of banks of their stockholders and creditors into failing to gain significant access we need to be recapitalized by their host country governments. it is a transfer of losses from bank creditors on to the backs of ordinary people without requiring any cost to the banks whose practices help lead us to the problem. it is much a tell of over lending as it is of over borrowing. just as nobody should feel undue sympathy, nobody should feel for those in miscalculated their

lending. the fundamental construct of the euro is flawed. it's basis depends on substantially different economies and a different levels of competitiveness among those economies sharing the same currency. to the economies have proven on able to rationalize their differences from the monetary union. in u.s., we have a transfer mechanism allowing tax dollars to be reallocated to those less fortunate. the european countries have demonstrated an unwillingness to accept such. the solution is to either move forward with the fiscal union completely transfer of payments or break up. these are political decisions. there appears to be little popular support in germany, finland, and the netherlands for such a union. unless that changes, the result will have to shrink its membership or resolvthe dissolv.

proper u.s. policy should support our values around the world not undermine them. we should support the losses first to equity investors and then to unsecured radars. we should no longer support privatization of laws. in doing so leads to distortion of market incentives and for their risk-taking by those who have demonstrated an inability to properly manage risk. the european crisis demonstrates all too clearly that the problem is now well beyond moral hazard. a great many of the decisions being made now could name a crisis management and not be made by the elected representatives of the people of europe. they're being made by technocrats. the crisis is moving into a stage where they represent its. there's also the destruction of global markets. i urge you to consider whether

this is the approach to crisis management that our country should be endorsing. in may 2010, at the fed reopened swap lines with the european central bank to bolster liquidity for institutions. it was costing. to increase the attractiveness, they lowered the interest rate by half a percentage point. since then, lending to the wind increased from $400 million to $50 million. well it may be consistent, they are being made in the near darkness. as the result, it is implemented largely by authorities. it was demonstrating and ability to recognize the scope of the problems and come to a consensus on how to address the crisis and prevent it from spreading. they saw to deny the problems

and downplay the impact. they have chosen the messenger. are these proper policies to the united states to endorse? by providing unlimited swap lines to be used, institutions which may be insolvent would allow the fed to direct u.s. foreign policy and in support of a single currency. as risk of the losses rise in the event of a break up, it they seem likely to commit as further to support that. the fed has expertise but such policy decisions should not be made about informing congress. i suggest that you consider whether the effort should be directed more toward quantification of the problem them providing technical advice to congress.

dodd-frank require them to say which ones receive loans. why haven't they required the ecb to inform them of the arrangement? what they're many more questions to be as, they suggest there are reasons for the fed concerned about ongoing instability. there appears to be able rational basis for the actions they have taken toward short- term stability. we can believe the fed is acting appropriately. without more information, we do not know whether they're focused on a short-term stabilization properly aligned with u.s. policy goals. perhaps we should support the union. they have decided in favor of continued support. it seems fair to considered as such for policies decisio shoule made by the secretary of state,

u.s. trade representative, and the secretary of treasury with support from congress. thank you. i will be pleased to address your questions. >> thank you. mr. ely? >> members of the subcommittee, i appreciate the opportunity to testify today about the euro crisis and what it could mean for u.s. taxpayers. i wish i is the more positively about the situation that my fellow panelists. i cannot. europe would not be experiencing the crisis if it had never been created. the fundamental problem with the eurozone is that it ties similar a economies to a similar currency. the eurozone lacks the economic and language immigration that has long benefited the west. it greatly in paris of the

sustainability of the eurozone. a key characteristic is that there are minimal barriers of services and later. these keys are not president in eurozone. there are still many practical barriers in movement within the eu. this impair the efficiency of the eurozone countries. export goods produced these. this is especially true of the southern tier. the euro covers the gold standard witwhich the u.s. abandoned. it fixes the relationship

between the currency accounts. because they of all that different rates, economic tensions develop among countries tied to each other by a common currency. the vix relationships become increasingly difficult to maintain and tell a breaking point is reached. -- until a breaking point is reached. abandoning the eurozone would be quite painful for a country. mortgages and bonds would have to be allocated and rewritten at in new currency to spare debtors being crushed by repayment obligations. owners of the year rose are being -- of the euros appear to be shifting them to banks. the recent attempt to fix it by

amending the treaty is to impose greater fiscal discipline in e du. it will not work in the short term. fiscal problems are so deeply imbedded that they cannot be fixed with in a few years. it will be a decade-long process. my written testimony discusses the problem. a weaker year is no country has much to do. how many will succeed in doing so is a huge question. a year of crisis could end the recession. the best dominos topple with in the eurozone. european recession could trigger a global economic slowdown with the u.s. falling into a recession. a slowing u.s. economy would

increase the already enormous issues. the u.s. economy would look like the most troubled european countries. it cannot be a pretty picture. the u.s. has few options. the best i could do is urge the eu to address the problems and told the eurozone to gather -- together. i am skeptical how much help the imf could be. given the financial weaknesses, at the federal government should not apply any threat to help them define the debt. i do support the u.s. dollar arrangements recently introduced. these arrangements provide liquidity for the financial system while the eu worked

through their problems. i see no taxpayer risk. the u.s. should take it as another wake-up call. they are reducing this with the rest of the world. they are removing taxes. this is an enormous politically challenging task. we are not ready to be laid low. thank you for this opportunity to testify. i welcome your questions. >> we will now go to questions. i recognize myself. let's begin at the beginning. the federal reserve has foreign currencies what the normal function of the federal reserve for quite a number of years. explain what that means.

>> what it means is that the eurozone can actually swapped currencies with us. we stand she dollars to us. -- we shipcheap dollars. >> white is it an issue? -- w hy is it an issue? >> it is not being done at parity. we are not providing the currencies that they market. it is a subsidized rate. we are subsidizing europe through the swap. >> the issue here is that we reduced the cost of this exchange and made it below what is the current market rate.

therefore incentivizing the european central bank to transact this kind of a swap agreement with the u.s. federal reserve. what -- in light of that, i have as to this question before. what are your chances? what do you see the likelihood that the euro makes it out of here? that the euro actually exists as a currency in medium term? >> i think you need to distinguish between losing a number of countries and the cold euro hearing. it is very likely that in the next year we are going to see several countries exit the euro. we will see them be forced to leave the euro. the bureau itself as a currency

between germany and like is likely to continue to exist. >> across the panel. do you agree? >> as i said, i do not think the euro can be saved. we can save the court. the fantasy they can bail out the paybacks is mission impossible. it has to break up. >> it is highly likely that all 17 member states. >> it is likely in the medium

term that the euro continues to exist. adobe difficult to have members exit. >> i am in general agreement with this. if they leave relatively soon, despite the problems of transitioning back to their previous currency, this may actually be positive for the global economy. they will have cheaper currencies. their exports will become more competitive. this may be better for those countries and the global economy if they leave sooner rather than

later. they can go through the adjustment process. for the remaining countries, and they have to address the classic problem of any kind of common currency area. that is the policies are not too far out of synch from what they are in other countries in the currency area. that is a huge long-term challenge. >> you have to remember part of the problem that we have watched is that they tried to avoid that default from occurring in periphery by any means. we watched it tends to come through their voluntarily. it is becoming a default in names. this is part of the problem. they do not want to allow it to be called a default. what that would mean creates a

problem in timing. we delayed this. at the point when greece was recognized, there is a problem where it should have been valued at about 80. we're trying to get 50% writedowns. it is not even worth of that. the longer we wait, the lodger -- the larger they will be. we're trying to do everything we can to avoid calling it a defaults. we will end up a disorderly default unless we recognize it. >> my time has expired. to the point here, why this is a discussion, in light of opening up a low market swap rates with the federal reserve and the view that the survivability of the euro as it exists does expose the taxpayer to risk. that is the concern that we have.

that is what you're trying to have this hearing today. i would like to ask mr. quigley for five minutes. >> you said something that does arisen going to ask. he said it might be better for the smaller countries to be forced out its. are you assuming that they are going to get some of the get help. are they going to go through this adjustment process? >> this is highly speculative. >> my sense is that they would not get much help. it would probably lead to the debt restructuring that-joe was just talking about. it would enable them -- their currency would be more

competitive. this is just an increasingly draconian austerity. it creates this problem. they go through the debt adjustment process. i think for some of these countries the only way they can do that is by leading the eurozone. >> if anyone else would like to time and that i want to understand why is standing alone would be good for them and what impact it might have on the united states. >> first is a background point out like to expand on. you are hearing political

judgment here. you are hearing judgment as to whether the countries have the political will and capability to deal with their longstanding problems. >> sorry for interrupting. if you could add, it seems that they have the financial capability of solving this. >> that is certainly my view. they have clearly the ability to deal with us economically. the question is, will they take the political actions necessary to do so? i am significantly more positive about that than my fellow panelists. one reason for that is i think too often we look at what has been agreed to date. that tells us what the ultimate outcome will be. this is like looking at the debt ceiling debate here a few days before the agreement, concluding there will never be an agreement because they're so far apart or looking at the current budget

negotiations and assuming that because we cannot agree the government will shut down and never start up again. i think there are strong political wills with in europe to get this together. they made a lot of mistakes. i am not trying to say they have been brilliant. my view is when they get to the edge of the abyss, they really will be likely to do what they have to do. >> i just want to throw my 2 cents in there. i think one of the only solutions for them is to write down the debt. that is politically dangerous. it is also economically dangerous and perhaps impossible. they just came out with a report stating greece is not following austerity. they're not moving fast enough. they're dragging their feet. e? that a surprise in fact no

absolutely not. the banks are glad to have to take it on the chin. look at the debt load of germany and france. their massive social the state. they cannot do this in the long run. they could do it for a year. for get over the long run. they are all too debt-laden. >> i think that the essence of the problem in countries like greece, portugal, and ireland is that they are not solvent. additional funding is not a solution. it is thought just a question that it is a problem. they cannot produce those imbalances within a fixed exchange rates. if they try to do massive amounts of fiscal austerity with in a fixed exchange-rate system, you get the result we have seen in agrees with the country

collapsing. they do not collect the taxes. the debt ratio at the start of the imf program was supposed to peek at 130%. the latest imf estimates are that it will peak at 190% of gdp. this country is clearly in softens. it has to write down the debts and deal with the problems. if i might just add one. in connection with the swaps that they are making, they are providing cheaper credits. part of the reason for that is the united states money market funds have huge amounts of deposits on the banks. they are trying to repatriate that hope. by providing those, we are not

simply helping the europeans. we're helping ourselves. we will eventually have to break it like in 2008. >> my time has expired. >> mr. cooper for five minutes. >> thank you. i think perhaps the most important question is the simplest. is this a crisis of the year as some or a crisis of the west? most of you have pointed out that just the trade implications alone mean that we have a stake in in crisis whether we want wonder not. when you talk about taxpayer exposure, we have to remember that countless americans are shareholders. their shareholders in institutions that have lent maybe even trillions of dollars

of two countries in the eurozone. it goes without saying we share many cultural and other ties with this troubled area. sometimes unspoken is the idea that entire capitalist systems are built on confidence to some degree and leverage in trust. just a few years ago, there is a prominent banker that had the famous doctrine that no sovereign country could ever defaults. he was not a creature of government. he was one of the preeminent spokesman of the u.s. private sector. things have a way of changing. >> if i could address that. he did not know its history. there has been plenty of sovereign defaults before he made that statement. we have seen them since.

it is potentially a global crisis. when you look to japan and china, each of them have some very serious problems. in japan for instance we have debt to gdp ratios that exceeds any country in europe. and china, people are waiting for that to blow up. it is more just a crisis of capitalism. i think it comes back to the issue of just too much debt. i think josh made that point. it is just too much spending on the global credit card. this is what has to be reined

in the united states. >> these are all valid points. this is a complex issue. too much debt generally depends on the ability to repay. these are different factors. david walker pointed out that fiscal responsibility is in the top 34 nations. the u.s. ranked 28 behind some of the country's in europe. there are different ways to measure this. none of us wants to be unduly alarmist. we clearly have a lot of work to do in on country. our own credit rating was threatened for the first time in modern history. as we approach these issues, the longer you wait to deal with it the more the contagion spread spirit the greater the risk to confidence. -- the more the contagion

spread, at the greater the risk of confidence. i wonder if the contagion could have been limited. the origin of all of this bemiseits promises that cannot paid. we often refuse to even if knowledge the broad debt for our own country. i see that my time is expiring i recall that one person has called for competition to have the best idea to calmly about a sovereign nation to default are a sovereign nation to leave the eurozone. are you aware of any good ideas in that area so that the dismemberment can be managed in a sensible way if that is what it comes to? >> i am the one that made that comment.

there actually is a little bit of historical experience with currency arrangements in common areas and the like coming unglued. nothing is the magnitude we have today. it is not going to be an easy process. it comes down to the questions of the alternatives. this is potentially worse. they would delay the inevitable. before i looked at this, the sooner the problems our address, the better. >> my time has expired. >> pennsylvania for five minutes. >> thank you. i want to thank each of the panelists

-- but for the remarkable capacity the you have to take these complex issues and put them down in and of themselves as a challenge. this is a sobering issue and i thank you for the work your putting into it. dr. sanders, you mentioned something, and a discrepancy in whether some of these commitments were $7 trillion or $1 -- $1.50 trillion. where we not getting unanimity about something that fundamental? >> what this was about was the fed did not disclose the window of operations. and they still have not disclosed exactly fine details on it. and they have not disclosed their guarantee programs yet. but what happened was, with the freedom of information act, fox news and bloomberg as to when the information was produced.

but the fed and bloomberg handled it differently. >> i think mr. ross burk used the word opacity. why are they able to keep that kind of fundamental information, it is tying back guarantees for united states taxpayers, private? >> i think they are worried about bank runs. they do not disclose the discount window and there is not information out there. although, i would argue the exact opposite. i would say if there is a threat of a bank run, i would want to know that information. i think the fed should not be putting american taxpayers at risk. although, they have lowered interest rates so low that many are getting pummeled, but that is a different issue. and again, i think chairman bernanke will defend the fed

being secret. a lot of these problems will be settled down if we made them transparent. they really should be. >> mr. rosner, you used the word opacity. i was struck by that. why isn't the european central bank being told to tell its loans. or you can respond to my first question. >> part of the problem is that there is a huge difference between illiquidity and insolvency. one has to wonder whether part of the reason for the capacity is to protect those who are seen as illiquidity from being shown to be insolvent. >> what do you see as the difference? >> if you have short-term funding issues, but the assets on your balance sheet actually allow you to be well capitalized or the longer term, you are solvent.

if you are fundamentally insolvent, no amount of liquidity will repair that. it will just smooth over the market impact over the short term. this is part of a problem going on, that the europeans have taken the step after step to make claims over -- of solvency over institutions that are fundamentally insolvent and ask it in illiquidity, or liquidity problems. >> italy is the country -- >> no, i think it is also the core. you have had problems ataxia, commerzbank -- at dexia, at commerzbank. it is not just that is the liquidity problems, but it seems to me in some cases it is in solvency problems. we also have to recognize that part of the fiscal district -- discipline that everyone is talking about and everyone is calling for includes getting government out of the business of providing funding for

creditors benefit on institutions that are fundamentally insolvent. that is a commitment of fiscal resources toward private creditors, as opposed to allowing market discipline to force losses to be recognized. >> what do we do then to make those predators, who i guess, are passing on at risk so to speak, how do we put them back into their report replacing line so that they are the ones to accept both the benefit of the risk, but the impact of the downturn? >> by some degree, it is -- to some degree, it is by stepping away. it is not what the truck in ireland, which is to force the irish government to recognize the insolvency of the banks as a way of having to take losses on those obligations. >> would iran on the banks be an

overall run -- would a run on the banks be an overall run on insolvent institutions? orix if regulators stepped in the head of that run and shut down -- >> if regulators stepped in and had of that run and shutdown those veterans of and, we would have off the bank runs, as opposed to what we are doing. which is giving leadership to the european market and telling them where the problems are, and the leadership does everything to avoid that coming out. we sought a bank stress test in europe in 2010 saying that only 91 institutions had real problems. we have seen since then that the stress test was deeply flawed and inaccurate. we have done quite a bit to cover up in solvency issues in the name of liquidity issues. >> thank you, mr. chairman.

i yield back. >> thank you. in the american financial system in your book at "reckless endangerment," which is quite a read, you talk about this. mr. welch for five minutes. >> thank you, mr. chairman. i thank the panel. is it basically consensus that more information is better? is that a point that you all agree with? >> no. >> do the others agree with it? >> yes. >> yes. >> i agree that more information is better, but the key question is, how do people and how do policymakers' specifically react on it? what counts is not what is spoken, but what actions are taken. >> is that de "you can handle the truth"? >> it is to a great extent. >> usain no.

-- you say no. it sounds like, as long as we confuse the voters, it is all right. but voters do not like that. mr. bely, -- mr. ely, you seem to say that keeping these obscure is was better. >> it is a question of balance. in the middle of a crisis, it is very hard to tell the difference between illiquidity and insolvency. there is a fear that, for example, if you publish the discount window borrowings in the short term so people know very quickly that if a bank does bar or out of the discount window, which is secured borrowing -- they bring good efforts generally to get that money -- and if they do that,

which is important for liquidity, they will be seen as potentially insolvent. i think most people agree that the discount window, if you do publish it, you at least once a delay of time. >> the difference in your view, if i understand where you are saying, -- what you are saying about the changing information in a crisis where a market may react emotionally on a hair trigger, but what about having systems that allow markets to digest over time, in real time, what is going on? >> i think if there is enough of a gap of time, that i'm definitely comfortable. the figuring out what the right calf is -- what the right gap of time is is hard. >> i don't have much time. >> corporations have an obligation to show -- an obligation to shareholders.

and how can we argue against the disclosure of that information on the belief that there is no such thing as a rational investor who can read a balance sheet and understand and income statement? >> thank you. >> i see mr. elliott's. . however, if you look at many major banks around the world, they would all be insolvent. that signal is already out there. under those set of circumstances, i don't see the necessity to the fed keeping everything blind. >> very quickly, i think that in this day and age it is naive to think that you can keep the markets ignorant of what is going on. this is an enormous amount of chatter that takes place in the

money markets and with the analysts. but the real downside of trying not to disclose information in a real-time basis is that rumors develop. people may make judgments and see false negatives in the sense that that -- that they may assume that made the problem is more widespread when, in fact, it is not. then you are not disclosing information. >> thank you. doctor? >> in the european context, the problem is a lot deeper. the europeans have allowed the banks to keep the solvent debt of the periphery on the banking but at 100 cents on the dollar, which is agency not correct. we get the particular results that we had that was mentioned

that says we have a stress test. if we are assuming that it is impossible for any of their country to default. i think they are not doing a service by being very opaque and actually encouraging the perpetuation of some sort of myth that these debts are going to be paid back. >> thank you. i yield back. correct my colleague will now step -- start a second round. i recognize myself for five minutes. the question is, how large do you envision the swap line? how large a you think it could get? in the crisis in early 2009, we had about $600 billion. dr. lachman, what is your view? >> i think you could quite easily go up to 600 billion euro. you're talking about a european banking system that is huge in

relation to that of the united states. you are talking about an economy that is one-third of the globe. the banking sector is very important. the chances of getting to $600 billion, i'm just thinking in terms of the amount of money in the united states that money market funds have parked $1 trillion. and getting up to $600 billion would not seem to me to be a stretch. >> i agree with the doctor. i think we could get above that amount, of to the $1 trillion level, or perhaps even higher. and because we are not seeing what is happening in real time, i know that chairman bernanke said he has no plans to bail out europe. but since we cannot see the balance sheet, i would say that they are probably going to expand the swap lines. >> the short answer is, i don't know. i'm not deeply worried about it. the european central bank has

very, very good credit. >> i do not think you can know unless you have a consensus of how the two are going to move forward to recognize the crisis and if we continue on this trajectory, i do not disagree with either dr. sanders or dr. lachman. but it is unknowable at this point. >> i agree that it is a noble, but the longer these, problems continue, they continue the uncertainty about these banks and their apparent government. one can easily see the amounts on the swap lines going up and up. i would worry as much as anybody else about the prolongation of it. when is the fever going to break? when will things start to turn around? one wilbanks be able to resume or be able to fund -- when will

the banks be able to resume or be able to find themselves more? until we get to the point where there is greater market confidence in the banks, we will see substantial amounts. >> let's say the fed goes beyond simply the swap line, which they had in the last crisis. we are basing it on now the survivability of europe and the eurozone as it is currently constructed. what if they go beyond that? what policies do you believe the fed has in the event of even greater stress in the european financial markets? what are some scenarios that you envision? >> the scenarios that i am going to drought are extremely unlikely, and -- throw out are extremely unlikely, and i do not think we want them to do it. i have not checked, but i think

the fed could legally do the same thing that the european central banks are doing, which is to find a way to get some money into the imf, for example. or to find a way to loan money to the european stability fund, or something like a dog. but i do not think it would be desirable for the fed to beat putting -- to be putting money into these rescue funds. mostly, the fed, the limit of what it can do with regard to europe, obviously, it could do more monetary stimulus here over concerns about europe. but i do not think there is a lot of room to do things. >> european banks that have a presence in the united states already have an open line with the fed as it stands now. but they're open market function -- because they, too, our banks. -- our banks. -- are banks.

could they have european assets held by carl banks? >> i believe they could. it would have to be other banks selling the same kind of assets. >> but there would have to be in excess there. -- a nexus there. could you imagine the selling of european bank assets? >> if the asset our usf, yes, i could imagine doing another version of the telf. if they are european-based assets, it is hard for me to imagine that. ofi'm just asking because the range of options of what we saw the fed do in the last crisis. enter dr. sanders point, the question about whether it was $7 trillion or $1 trillion or $1.50 trillion, the average -- the

point that the average american citizen has is, what is the fed doing? the lack of information means that many americans will simply fill in the blanks on what happens in that black box. to mr. rosner's point, as the stock holder of a bank, it is hard to tell if a bank is doing great or awfully, or what the range in between is. the lack of information, that is at least what i want to have some scenarios. so that we are not completely surprised by the fed. >> in the short term, it does not seem like the fed is going to have to take a lot more action than they have done with the swap line, in part because again, in an attempt to kick the can down the road we have seen the european central bank offer

1% money for three years to their banks. it is increasingly likely that they will deal with sovereign debt auctions next year as banks within each sovereign nation being called for on to be large purchasers, which has ramifications for economic growth and the overall economy. even as much as they are helpful in the short term. but i think that their approach to kicking the can will in the short from ameliorate more u.s. involvement. -- in the short term ameliorate more u.s. involvement. >> because they are going to do what is necessary or because the policy makers are kicking the can? >> because the policy makers at the c.b. at this point are trying to step back from -- at the ecb at this point are trying to step back from the fold and they will be stepping back in a large way. >> my time has expired. i now recognize mr. neehan for 5

minutes. >> thank you, mr. chairman. where do you jump in with all of this? we are talking about monetary policy in the current situation. is there anything being implicated here by a failure of these countries to really adopt austerity measures that may be able to address some of this? or do we need to continue this imf the support, and otherwise to sustain it from a meltdown? anybody can jump in on that. >> i will start. bear in mind that commerzbank is in deep trouble in germany. also in france. if we have any of these write-

downs, it will just think european banks. it will result in the question of who is going to come to the rescue. there are riots about austerity. i do not think it is solvable. it is not an a lilco -- it is not a liquidity problem. it is definitely a problem that they are all insolvent. if the titanic sank -- i mean, the titanic sank in a highly environment. >> if we kick the can down the road, where is the day of reckoning? >> the trouble is that the road is getting shorter. if we cannot keep kicking the can down the road. my view is that we are going to come to some resolution fairly quickly. it is difficult to see how you can string this along for another year, given the state of the economies, given the political resistance to adopting different measures.

the point is, a number of these countries are insolvent. the second point i would make, if you are talking about huge amounts of debt in question -- if we just look at portugal, greece, ireland, we are talking about $1 trillion. if you add in spain, you are talking about another $1 trillion. if you add in italy, you are talking about another $2 trillion. we're talking about $4 trillion that will have to be written down at some stage. that will have a huge impact on the european banking system when that occurs. given the connections between the european banking system and the u.s. banking system, it is difficult to see how the u.s. avoids a financial crisis if you get your up paying out a bad way. >> what would be the -- get europe playing out in a bad way. >> would be specific implications for the u.s.?

>> the specific impact on the united states is that the u.s. banks would be put under a huge amount of stress. you have a credit crunch in the united states the u.s. would go into a meaningful recession that would compound the problems. the way to look at it here is, like what occurred in the u.s. during the limon crisis -- lehman brothers crisis, the same way that ricocheted around the world, now what would be happening is that we would have a crisis that originated in europe. the world's third largest economy. that would have reverberations throughout the globe and the u.s. would be impacted. >> mr. elliott and mr. rosneft. >> i think that much of the panel that -- the countries that much of the panel thinks are insolvent are not truly

insolvent. greece is clear. but italy, for example, they will run a surplus this year. that means that absent the interest payment, it is actually in surplus. it has had a number of years in which the surplus was 4% or 5% of gdp. >> what is that attributable to? >> in the past decade or so, they have managed their deficits much better than they have historically, and certainly, far better than us. in the last decade, they have had deficits -- and these are not primary. these are actual deficits as we look at them. " they have had deficits lower than germany over the decade. lower than france. my point over the politics earlier, assuming that italy is insolvent, it assumes that their political system is so bad that they cannot figure way to pare a few points of gdp off of their deficit.

>> you have to remember that in talking about the problems of europe, we're talking about the backdrop of the past three years having decent growth in the eurozone. and that is over. they're heading into recession. even the court will be suffering that. secondly, it is important remember -- to remember that the european stress test, the agreements raise capital court to 9% next summer. that will be even more damaging to growth. and it will put more risk -- >> because there will be more capital out in the eurozone? >> we are giving the banks enough time that they're going to try to get their by reducing their books, by do leveraging. and that the leveraging is going to create further problems and

shrink growth further, as opposed to forcing dilutive equity raising. that is where the capital should be coming from the markets, regardless of place right now. i would point out to our crisis. had we forced freddie mac to raise equity in january and february of 2008, and not accepted their arguments that those would have been highly dilutive capital raisings, we might not have ended up where we did. instead, we allowed it to string along and that had a zogby institution that was fundamentally increasing -- zombie institution that was fundamentally increasing its risks rather than returns on those risks. we were covering it up. instead of allowing european banks to get their house in order by reducing credit availability to the eurozone, instead of forcing them to

dilute shareholders' -- >> that is going to have an impact as well on the overall ability of the economy to -- >> absolutely, which is why i find it so offensive that we are supporting policies where we put the burden on taxpayers rather than on the equity holders, preferred holders, some of debt, unsecured creditors -- sub-debt, unsecured creditors, rather than allowing it to negatively impact the economy in another way, which is the de-leveraging. >> if i could put another angle on this, the problem of european countries is not just the current level of debt and the debt to gdp ratio, but the ongoing deficits. many of which reflect structural barriers in the economy coming entitlement programs, early retirement, and so on. these countries are in a situation where they not only have a high debt level, but is continuing to rise.

they not only have the challenge of rolling over existing debt, but also having to borrow more and more in order to finance the continuing -- >> that was my question about austerity. >> it gets worse than that. when the austerity start kicking in, unemployment starts rising. you have a shrinking gdp. you have a shrinking government recede -- shrinking government reseat, increased spending what we are starting to see is increased interest rates on government debt as they try to roll it over. when some of these countries hit the wall and simply cannot roll over all of their debt, that is the question. where i think the real crunch comes is when the country has

debt and it simply cannot roll it over at any interest rate. the markets won't buy it. it is much like a bank when it cannot roll over its debt and then we get an honest to god government debt default. >> and we get super high inflation? what will be the result? >> i cannot -- i do not think we can have hyperinflation because government cannot make more current. but what would happen is governments, i would think, would be in a situation where they have to pay -- cut back on the payments they make, whether it is social security or pension payments or whatever. that is when you start to see the riots. i think that is a very serious concern, when these countries cannot roll over their debt and also cannot finance their

deficits. >> is fascinating discussion. mr. rosner, you mentioned in your testimony and a number of times that many of these european banks are insolvent. to that point, the ecb actually levied a penalty in order to force european banks to pay off the fed swap line. would that be an indication of insolvency, that they are using short-term paper for long-term debt? >> it could be. but on the other side, that could just be liquidity. it depends on the funding of assets. it depends on the assets. it is unclear, which again, is

part of the reason why it would be nice to see who is trying so you could take a better look at the assets that they have. >> at a time when the fed -- >> and by the way, it would be nice to be assured that the fed knows who is drawing on the swap lines and what the assets are that the ultimate borrower has. >> actually, to that point, mr. elliott, you agree that the disclosure of those swap lines would be helpful? >> i am of mixed minds about it. our swap is with the european central bank. that is our credit risk. it is up to them what they do with that. the reason i might agree is that -- that it would be useful is to help them with their policy deliberately. to knowsee desireing

what they're doing. >> even our u.s. banks have risk, but counter party risk in association with that? >> obviously, we would want to know that in general. we would want our banks to have reasonable knowledge about the situation of their counterparties. but there are multiple ways to get that information. it is not necessarily have to be knowing whether and when they have been using the swap line. i might also add that the dollar is the world currency. >> it would be helpful to retain that. >> i would love to retain that, too. the fact that there are european banks who have trouble getting enough dollars in this environment, as josh was saying, it might be a problem of solvency, but it might easily not be. i would worry, again, about the stigma issue.

in this environment, investor managers who want to keep their jobs by just not taking chances with look and say, ok, good, those guys use the swap line and i'd better just stay away from them. because staying away from them will not hurt me very much. if they go under, i lose my job. >> the fed discloses two years after the fact. is it a year? is it six months? >> i do not have a problem with something like two years. i thought you were talking about like in this case with the ecb -- >> we do not even know with the $600 billion at the height of the crisis, we do not even aware that when. that is really the crux of this discussion. >> i wanted to say whether the fed discloses this information or not, i cannot imagine why the

fed wouldn't and shouldn't demand of the ecb to know who is ultimately drawn upon those lines so the fed can see if there swap lines, which are intended to provide liquidity in dollar funding markets are being used to prop up insolvent institutions. whether that is to disclose broadly or not to the public is an area that deserves debate. i know where i fall on it, but i can understand the argument on both sides. the fed should want that information for their own analysis -- that the fed should not want that information for their own analysis and their own purposes internally does not make sense to me. >> american financial systems exposure to europe -- because the question is, if we have extraordinary exposure, then there would be an extraordinary policy desire to build them out in order to save our institutions. >> the bank international that our banking

system has about $2 trillion of credit exposure of various kinds to the eurozone -- or $2.70 trillion i think. i usually roll the u.k. into this because it is so closely tied into the eurozone. >> even though they are trying to extricate themselves. >> exactly, but if you combine them it is about $5 trillion. >> in terms of what i would call direct exposure, what i want to call is an indirect or macro exposure. if europe really blows up, and i certainly hope it does not, but if it does and they get an enormous economic contraction in europe, that will have global effects on the macro economy, and certainly on the united states.

then you ask what kind of new problems that creates for the u.s. financial system and for the banks, for instance, with regard to house prices. we have rising unemployment. -- will we have rising unemployment? we have to be cognizant of not only the direct risks, but the macro economic indirect risk. >> the dollar strengthening will have a negative impact on export markets. on the other side, it will have a positive impact on some of our domestic asset prices. ms. capital flows back into the country. -- missed capital flows back into the country. when we point out this multi trillion dollar number, we also have to remember that is the exposure you need to get out of private capital and private capital structures, which i think are there with a priority of capital. that capital may end up being wiped out and it needs to be

backed out of those assumptions, it isse i'm not sure isn' necessarily prudent for us to consider obligations that the government goes. >> back to the point that mr. rosner raise, but i think is critical, the imf has estimated the number on the balance sheets at something like $300 billion. what that is producing, because of the way in which they are letting the banks get to the capital ratio of 9% by june, they will have a capital reduction. it will be reducing credit to the tune of something like $2 trillion over the next year. when you have that kind of credit contraction at the same time you are asking for

countries to engage in massive fiscal tightening, it is the equivalent of tightening monetary policy, tightening fiscal policy in the middle of economic weakening. that is a recipe for a deep recession. that is the reason i do not think this can work. >> to build on what dr. lachman said, the ecb announce his re that they will modify capital requirements for the banks in europe? -- in europe. why? because they see a contraction as being very serious. that will require less capital, which makes the financial institutions more risky, which will eventually put the american taxpayers at more risk. this is kind of a never-ending game. >> they are thinly capitalized going in because basel says if you are holding sovereigns, there's no risk associated with it. it is kind of a fascinating

situation. there are so many questions about this. dr. lachman, you -- you mentioned exposure to money markets. we had one money market, one fund that brooks about. most investors do not quite understand what a money market fan -- a money-market fund is. it is not as the id -- fdic insured. what is that exposure to the european financial system, our money market funds to the european financial system? >> if the rating in june by the fifth raising agency suggested that the money markets are running about for a% of the european banks, the money market

in history is something like $ 2.7 trillion. if you take a percentage of that, you are well over $1 trillion. they brought down that exposure to 35%, but that is still a very large exposure. >> it was as recently -- if i recall 12 for 18 months ago -- over 60%. a lot of that was peripheral economies. there's almost no exposure to peripheral economies at this point. it is almost all the core, until recently with some smattering of spain and italy. >> i do not take much comfort in that argument. if the banks in the core are exposed to the periphery, then so or the money market funds exposed to the perjury if they have deposits on the court. -- to the periphery if they have

deposited on the core. >> i agree, but i would just like to point out that this is not a peripheral problem as much as it is being spun. it is a problem of the core banks as much as anything else. >> mr. elliott, you mentioned in your opening a three out a fourth chance -- a three out of fourth chance that europe will survive, to paraphrase you. what is your view on greece remaining in the euro? give me your percentage chance that they are still in the euro in a year, what are the time freeze you want to choose. -- what ever the timeframe you want to choose. >> sure, and to clear up, it is a quantification of and intuition. because this is very hard to know. but what i meant was more than just bureau of surviving, but

that there would be no default beyond greece. in terms of grease stain in the euro -- greece staying in the euro, i think is rather likely that they will stay. they will do whatever it is called. there are a lot of advantages to staying within the bureaeuro. i know dr. lachman very much disagrees with that, but most of the people i talked to agreed that they will try very hard to stay in the euro. >> greece as a modern country, in the last 150, 70 years, they do not have a great record on pay people back. >> there's no question they are defaulting. i am saying that is a different question than pulling out of the

euro. >> it is a question of what they call it and when. >> i do not think there is any question that the greeks are going to pay back their debt. we know that is not going to happen. there has been this rather dangerous thing of trying to arrange it so it does not get into the act as a default, which i think has done terrible damage to the credit defaults swaps market. >> everybody agrees with that. does anybody disagree that the harm to the credit default swap market is serious when we have this type of action? ok. about greece, is a question of everybody agreeing that they are going to default. is that true? what they call it and when it happens, is that really the question? >> and how much. and if i can add to that, to what extent the issues of cds

going to have to take a loss. and then you get to the question of dominoes toppling in terms of where the risk is on the german debt, and how those losses are going to hit and who they will hit. i assume it is not just banks, but insurers and other types of institutional risk takers. >> i think, when you are discussing reece defaulting on its debts and having these orderly defaults and may be writing down the debt -- the debt by maybe 70 cents, 80 cents on the dollar, you also have to take into account the contagion effect that will have through the rest of the periphery. the european central bank for the past year and a half has been trying to fight the idea of default because they know that if greece defaults, what will happen is the greek banking

system will be wiped out, you have capital runs on banks. it will set an example for depositors in portugal, ireland, and so on. it is very likely that if you do get a disorderly greek default, you will get real pressure on the rest of the periphery that will cause a chain of defaults and that is because of the reason that the european central bank has been putting up this fight, which i'm pretty sure that in the case of greece is a matter of time. we are talking about months, if not weeks before this event will occur. >> i have heard one theory that is absolutely in their national interest -- international interest to simply walk away from their debt, as long as they can cash flow their government, in essence. is that similar to your point of

view? >> the question that greece is not in a position to pay the debts -- what is occurring is that over the last two years, byece's gdp has contracted 12%. their economy is literally now in freefall. that is eroding the tax base. they cannot meet the budget target. they have got to do more austerity and the people are out of the street. greece is not in a position to take more fiscal measures. at that stage it is difficult for the imf to keep throwing more and more money at a country that is probably insolvent. that is the point at which greece defaults, and we are not far away from it. there is a new government. there will be new elections are around the end of february. i would expect it are around that time that you will see greece leaving. >> with my accent that what some

might doom and gloom. you make it sound more upbeat. i'm only joking. mr. elliott, you believe the imf does need capitalization. treasury can authorize another $100 billion for the imf and the administration would simply have to make that decision. your ideas that the imf is fully capitalized to take on this crisis. >> that is my view, and the sense that i believe this has to basically be solved in europe. it is useful to have the imf bring in enough funds to bring -- be a serious player, but i do not think it is and to be it's a serious resources. >> was the dollar amount? >> i have $193 billion

available and will have more to contribute to the imf. >> does anyone on the panel disagree? doctor? >> if you look at the amount of the -- of money that the imf would have to provide to italy and spain and that they did the same thing as they did in portugal and ireland, you would be talking about $750 billion for italy alone. the imf simply does not have the kind of money. the onus of shortages -- sorting this out should be europe, not the american taxpayer. there would have to loan money to the law, which means they would have to get the imf on

their playbook for 70% of whatever the loan is. i think that should not be permitted. >> the idea -- the opportunity for china to inject themselves into the imf and put forward the equivalent amount in order to take on that sort of crest, another $200 billion let's say, is that in your range of options are likely. >> that could very well occur. if china has a claim on the imf and then the imf rose and uses that money for italy and the taxpayer is exposed to that loan to italy as a shareholder at 70% of the loan made to the imf. the widows should be made is

administered through an account where the imf is just a conduit and it does not expose the shareholders to any risks of those loans. >> one of the things that we have to do is step back a little bit and realize that you essentially have governments either directly or through the imf becoming founders of the deeply indebted countries. you still have these ongoing deficit in these countries. all it does is keep the ship afloat for a little bit longer. we are bailing faster, but the ship still has big holes in it. the question is, do we have enough time for this liquidity provision to enable this

government to make the structural reforms they need and get back on track? i do not think liquidity can keep things afloat long enough for these countries to make these changes. plus, we are seeing backsliding in greece, as was mentioned earlier. are we really solving anything? or are we digging a deeper hole with now the taxpayers not just in the united states, but elsewhere, increasingly at risk. with the government's becoming the private creditors to these countries. >> thank you. after this next line of questioning we will finish. >> thank you for your very interesting testimony. mr. ely, what you were just

lachman g, didn't dr. in his testimony more last suggest that the combination of austerity and a growing challenges in greece make them incapable of taking on more right now? we are starting to potentially see those same demands as we talk about austerity moving into our land. is this a cascading effect? is that we are seeing? >> i think that is a very serious risk in the most whobted of the country'ies are experiencing the greatest degree of austerity. there is rising unemployment and declining tax receipts and increased government spending. it just means the current deficit in these countries continues on and they have to

borrow more and the debt to gdp ratio goes up. the question is, how high can it go before they cannot resist any more debt and fund next month's deficit? >> the problem certainly extend beyond greased beyondgreece. countries like -- the problem certainly extend beyond greece. countries like portugal and italy and ireland conceptually have to do the same thing that greece has to do, which is tied the budget by a large amount -- we are talking about 2% of gdp in italy in 2012, 2013, and again in 2014. they're having to do it in the context of a credit crunch and where there is a deterioration in the external environment. it remains to be seen whether

countries like spain and italy can withstand many years of fiscal austerity, declining growth, rising unemployment, calls for more austerity. the social fabric does not hold up well to this. we have seen five governments fall in the five affected countries. i am not sure they can stick to this road of austerity and poor economic outlook for a very long time. the reason they're doing this is to keep the banks in germany afloat. >> each of the governments that fell was replaced by a government that was more venerable to the austerity measures. >> i just really have two other questions. but we have talked a lot about this in the context, as i have

been following this, europe having to deal with its internal crisis and its relationship back to the united states because of our involvement in supporting the imf. and therefore, we are assuming some of this responsibility. i also take from this that we are worried about the recessionary implications on our own economy if we have problems in europe. how about other economies? the asian economy. south america. are we watching them being isolated in any way? or are they similarly going to be impacted by this? effectively, are we seeing the front end of a global recession? >> i think that is an important point to raise because that is another piece of it. large portions of the chinese economy are funded through

european banks. europe is obviously china's largest export market. much of the south and central american economies are also funded through european banks. it-financially is a global -- it is by definition a glottal economy. some parts will be different than others depending on the outcome. but as far as more just a european crisis, especially since to many of those economies to which we export to the degree that we do get their funding from europe, that will determine the effect. the text not just for china, but also a social unrest potential -- >> not just for china, but also social unrest potential. they export so much in europe. if they have a slowdown in europe, it will have a negative impact on china and on its level of employment.

i have already been concerned about china being somewhat of a tinderbox. it is amazing how often you read about local disturbances in china. there is a fabric here that is not a socially strong in this -- as socially strong in this country. we have to think about those secondary and tertiary effects. specifically in china because it is an export driven economy. >> my last questions relate to points that i was not able to fully i understand. as i was listening to american exposure, it was largely discussed in the context of our participation in the imf. how about some of the other institutions? and how does that relate back to the typical american investor, you know, the guy who buys into a money-market fund, whose retirement is dependent to some

extent on these kinds of things? how does the everyday american who has some portfolio of investments going to be impacted by these things? and do we have impacts on our pension funds, or any other kinds of insurers, like we had with a.i.g. that are not being discussed as much, but may have a genuine exposure? this is the last question i have. >> i will take a stab at that. ultimately, individuals are the owners of the economy. on the various levels of financial institutions. he rattled off insurance companies, pension funds and so forth, to the extent that there are capital losses by americans,

that will, in turn, reflect on things like corporate pension funds, union funds, a broad range of financial intermediaries. but ultimately, that loss will come back to individuals and families in this country. it is unavoidable. there is no someone standing behind a curtain that will afford those losses. the come back on to us, everybody in this room. >> let me emphasize a point that bert made earlier. the indirect effects are larger. if you think about going through a recession, that will be an even bigger effect on the direct marketing pact. >> if you look at my figure 11 in my presentation, the fed is literally out of bullets. we are not going to have a great ability for the fed to step in and provide any sort of intervention.

this is not affecting gdp anymore. we are kind of numb to further government intervention. now we are between a rock and a hard place. >> on that bright note, mr. chairman, i yield back. >> i thank my colleague, mr. meehan. thank you. i said that with the end of the questions. i have one more, if you do not mind. we will start with mr. ely and go across. tomorrow, we have president dudley of the new york fed appeared to have the individual of the federal reserve board downtown here who deals with international markets. we also have a representative from treasury. treasury. they are even closer than the fed and certainly closer than york. but what questions would u.s. tomorrow? what question, if you had to

boil it down, would you ask in tomorrow's hearing? >> how will this play out of the next six months to a year? i do not expect you to get a very candid answer, but i do think that that is the question. what are the various scenarios as to how this situation will play out over the next two years? and what will be the feedback effects on the u.s. economy? >> i've provided specific questions in my testimony. >> what is the no. 1? >> what comfort they have that 17 countries, each with different political dynamics at home will be able to come to a solution? what is the purpose of their policy tied to that?

short-term? medium-term? long term? what is the effects policy in the environment where, most of the 17 leaders do have what they would like to see happen, they have very different social dynamics in their home countries with their populations' constituents making it impossible to do that? so what is there view of the policy in terms of the single currency? >> ok. mr. elliott? >> i think i have one question. i would ask them to talk about the solvency versus the liquidity question? do the weaker countries who are suffering from a liquidity problem or is it a solvency problem? i assume they will sesay liquidity. the following question is how you come to that conclusion? >> i would ask, if you have one

bullet left, would you use of for the american economy? not to shoot ourselves, but to help us out. [laughter] i want to hear their assessment -- i had this same calculation -- $4 trillion is what it takes to bailout italy and the peripherals. if we are talking about an additional 200 billion, is that throwing money away or will this end up a much bigger amount? i do not want to say that will never happen. we have already seen a lot of bad things happen. >> i would suggest a couple of questions. one would be a variant of the solvency vs liquidity question. why do you expect imposing

fiscal austerity on countries at a time of economic weakening and at a time of major credit crunch in europe will not lead to a big recession that will unravel the public finance systems of the countries involved? the second question is why do they think that a policy approach to italy and spain that they have tried and has failed in greece and portugal and ireland -- why it would work this time around? how will they be safeguarding united states taxpayers' money from these loans that the europeans are making to the imf, which is putting the u.s. taxpayer on the hook? >> ok. quite a number of questions.

i thank you so much for being here. this is very helpful, very useful information, and a very wide ranging discussion. i thank the panel's willingness to engage in that conversation. what is clear is that there are enormous -- there is a number of questions about fed policy and about this administration policy about an exposure to the european financial crisis that they're facing. dr. sanders, in your opening, this was about excessive government spending and excessive debt. this was about over-lending and over-borrowing. one is more focused on the government and the other is more focused on the banking and institutions. but the economic risk is real to

the american taxpayer. it is a question of the magnitude of that risk. our exposure to europe is real to the american taxpayer and these institutions, such as the imf, as well as to the american worker. and their ability to get a job and the growing economy. there is some consensus about the likelihood of a greek default. the question is what does that look like? when will it happen? and what is the rock cost in terms of -- the raw cost in terms of currency? there's not a consensus on how the euro will last in the medium and long term. i appreciate your time. members will have seven days to

submit opening >> this meeting is now adjourned. [inaudible conversations] [inaudible conversations] >> the british committee investigating phone hacking allegations against a now-defunct news of the world newspaper, will hear from piers morgan this morning, former editor of news of the world and is now a host on cnn. we'll have that live here on c-span2 at 9 a.m. eastern.

>> with the iowa caucuses and new hampshire primary next month, c-span's series "the contenders," looks back for the 14 men who ran for president and lost but had a long-lasting impact on politics. tonight, james g. blaine. wednesday, william jennings bryant. thursday, five-time socialist party candidate eugene debs. and then on saturday, three-time governor of new york al smith followed by businessman and member to have liberal wing of the gop, wendell willkie. "the contend, -- contenders," every night at 10 p.m. on c-span. >> the c-span app is fast, easy to use, and the audio quality is convincingly clear. great app. end sanely great app considering it's also free. it took me about ten seconds to learn how to use et. >> anytime, anywhere, get streaming audio of c-span radio

as well as all three c-span television networks including live coverage of congress. you can also listen to our interview programs including q&a, newsmakers, "the communicators" and "after words." c-span, it's available wherever you are. find out more at c-span.org/radio app. >> now, a forum on what the new alliance between turkey and saudi arabia means for iran and the rest of the middle east. from the woodrow wilson center, this is an hour and a half. [background sounds] >> can i ask you to, please, take your seats because we are going to start.

okay. um, good afternoon. i joined the middle east program at the woodrow wilson international center for scholars. welcome to today's meeting on enemies or allies in the new middle east; turkey, iran and saudi arabia. this meeting is part of an ongoing series of meetings we have had for the whole year since the beginning of the revolution in tunisia, egypt,

libya and yemen and, also, the ongoing events in syria and bahrain. our speakers today are david ottaway to my left, he's a senior scholar at the woodrow wilson center and a former cairo bureau chief for "the washington post". we have the bios of the speakers are distributed, so i'll be very brief. david's last paper as part of our occasional paper series was saudi arabia in the shadow of the arab revolt. we have a few copies left. they are outside. we urge you to pick one on your

way out. our second speaker is hen ray barkey -- henry bar key, a former fellow at the wilson center, he's professor of international relations at lehigh university, and i just received a copy of his latest book, "iraq: its neighbors and the united states," which he co-edited with phoebe moore and scott levin si. our third speaker is trita parsi. he's the president of the iranian -- the national iranian-american council, a former public policy scholar at the wilson center, and his upcoming book, "a single roll of the dice: obama's diplomacy with iran," will be coming out in the

new year, and we have planned a book talk for mr. parsi in february. um, i think i would stop here. i will ask each of our speakers to speak for 15 minutes so we have enough time for a discussion, and there is an overflow on the fourth floor. we will take questions in writing from the overflow. david, you have the floor. >> thank you. um, i'm going to focus on the recent rapprochement between saudi arabia and turkey. and look at it from the turkish viewpoint more than -- from the saudi viewpoint rather than the turkish viewpoint which i have a feeling henri will deal with later. i think the first thing that strikes me about this new relationship between saudi arabia and turkey is that if you

look at their history, histories, you would not immediately say they might ever become friends. and this was really brought home to me earlier this month. i was in riyadh for a conference, organized by the saudi foreign ministry. and they took us to the history of, they call it, museum of natural history which is really the whole history of the arabian peninsula back to the big bang when the world began. but there's a whole section there on the three wahhabi states, and there's quite a bit about the relationship between let's call it saudi arabia today and the ottoman empire. and there was a startling reminder to me of how these two have historically interacted and been enemies and foes.

just to mention a few things. the ottoman empire in its struggle with the portuguese established an outpost in an eastern province in 1551 and stayed there until they were driven out, until 1680. mecca came under ottoman rule start anything 1517 -- starting in 1517 and fought the army of the first wahhabi saudi state, i call it the wahhabi saudi state because it's an an alliance between a religious leader and the saudi family, and that's how the whole thing got going and continues until this day. but that started -- the first saudi state began forming in 1744, and immediately went to war against the armies of the ottoman empire. the ottoman sultan put an

albanian ruler of egypt in charge of regaining control of mecca, the holiest site in the muslim world. that had been lost to the wahhabi saudis in 1803. 1818 muhammad ali's son, abe rah him, reached the capital of the first wahhabi saudi state. he captured it and destroyed the first wahhabi saudi state. worse than that, he sentenced its emir ab abdullah back to constantinople to be executed. so that's quite an interesting history to the whole relationship. and then the ottomans were in control of where mecca's located in the western part of, western coast of saudi arabia. until 1916 when the sharif of

mecca went into revolt with the help of t.e. lawrence and eventually he try today set up a kingdom there, and then the saudis captured it in 1924. anyway, the point is that this relationship between saudi arabia and turkey carries a lot of historic baggage and helped them, helped keep them apart for many decades. but all this began changing after 9/11. and this was because of three developments happening simultaneously during the past decade. first was the fallout from 9/11 which i'll discuss shortliment the second was the ak party coming to power in turkey in 2002. and the third was with iran accelerating its nuclear program. now, what happened after 9/11, as you all may remember, there were endless debates both here

and in saudi arabia about whether we saw each other as friends or foe because 15 of the hijackers were from saudi arabia, and osama bin laden was behind it. and there was a lot of tension in the relationship. and the saudis decided they had to go look for allies elsewhere than the united states. and, indeed, they did. and when abdullah formally became king in 2005, one of his first trips, first was to beijing just to indicate where they were really thinking they were going to get major help. but in august 2006 he went to istanbul, and this began a whole series of exchanges between the senior leaders of the two countries. ababdullah bule who has been boh prime minister and president of turkey had spent eight years

working for the islamic development bank, so he knew saudi arabia, and they knew him. so, i mean, there was a huge flurry of diplomatic contacts and relationships between the two. but i think initially the motives were quite different. the turks were looking for new business as turkish foreign policy is very much driven by its economic policy and it trade policy. they were looking for new markets. but the saudis right from the beginning were looking for a sunni counterweight to iran. unfortunately, turkey's policy of zero problems with all its neighbors, um, kept turkey from really coming out on the side of, on the side of the kingdom in the feud between saudi arabia and iran. furthermore, turkey was buying gas from iran, ask they had a lot of economic -- and they had

a lot of economic relations. and the turks didn't want to, i mean, we'll hear more from henri about this, but seemed anxious not to alienate iran. um, strangely enough, things really didn't begin to change until the arab spring. beginning of this year. and one by one the turks and the saudis found themselves more or less on the same side eventually in libya. took turkey a while to come over to the side of the rebels there. the saudis were behind them right from the beginning. but more importantly, syria where they're now both on the same side working with the opposition to overthrow the al assad regime. though not for the same reasons, i don't think. in the case of turkey, i think it's more personal betrayal by

assad of prime ministerrer to began and the promises he made and didn't fulfill. the saudis' position is really to eliminate iranian influence in syria and sort of get even for what happened in iraq where the american invasion created a, you know, a shiite-dominated government tilting towards iran from which was a major loss in the saudi constellation and thinking about the arab world. so here they are on the same side fighting to overthrow the assad government. and then in early, in september turkey decides that it's going to host the nato early warning anti-missile system, um, aimed

mostly against iran. and this publicly puts turkey on the saudi/arab/sunni side of the saudi-iranian conflict. i think that's really a major turning point in the whole relationship because that's where turkey really commits itself militarily to being on the side of the saudi side, the arab side of the conflict. you might ask, so how solid is this new rapprochement between the saudis and the turks? in my view, it's mostly based on immediate state interests. and it mostly has political rather than security meaning for the king, for the saudi kingdom. yes, it's true the turkish decision to host nato early warning system is militarily important to the saudis, but

turkey in my mind simply cannot replace the united states as the ultimate guarantor of the kingdom's security. and i think turks are very unlikely to ever send troops into the kingdom because of their past history if it really comes to a military showdown between iran and saudi arabia. i think they're much more likely to look for the pakistanis and even the americans to come defend them than they're going to turn to turkey for their protection. so you have a kind of double -- officially, you have the saudis welcoming turkey's new engagement in the arab world and saying they see no competition for leadership. unofficially, i think the saudis remain very wary of the turkish bid for influence and leadership in the arab world. one, because of the historic baggage between the two.

secondly, the turkish model of multiparty democracy even if it's islamic-oriented is anathema in the kingdom. they're not interested in any form of democracy. um, and then you get these vibes when you see -- i've had occasion during the economic forum in march erdogan gave a speech before a largely saudi audience and spoke for 20 minutes about the wonders of the new turkish government and what they were doing overseas, etc., etc. at the end of his speech, he got hardly any applause at all. and i was really struck by the lack of excitement, um, in the saudi audience for erdogan. and then there's some other, there's some other strange things going on. the saudis' ambassador to anchor

rah, the last one left early this year, and the saudis have not replaced their ambassador there. they've named him, but he hasn't gone back. for reasons that remain somewhat obscure to me except that it may have to do with the changing of the guard in the saudi leadership at the highest levels. um, but i think there are, there is some tension between the two. um, anyway, i expect you will see a lot of publicity about this new relationship on both sides because it suits their interests, and there's no doubt about it that the turkish turn against assad is really big news for the saudis. because the king has all kinds of reasons that he wants to get rid of assad and the government there. so i think what you'll see is the two will line up depending

on the issue. iran will help keep them together, and to me it's not impossible they'll begin working together in iraq to help the sunni faction of the iraqi equation have some say and voice in the government there. i would say that what we're seeing is all about arab real politic, not ideological affinity or promotion of democracy in the arab world behind this alliance. but it is important, and particularly to the saudis. and, um, one of the major new developments in saudi arabia's search for allies around the world. >> thank you, david. henri?

>> thank you, haleh, for inviting me. as i was preparing for this presentation, the title kind of made me think. we keep talking about friends and enemies. it seems to me that maybe we need to come up with a new word to explain things. the only word that came to my mind was acquaintances, but that was not exactly satisfying either. but this is, essentially, um, in many ways captures more the essence of the relationship between the three. that is to say that we're not talking about friends, and we're not really talking about enemies. we're talking about states that are making do with what they have in front of them. and, in fact, when you look back not very far back, actually, to 2010, people were talking about this great turkish -- i'm sorry, yes, turkish-syrian-iranian axis, and now we see people talking about a major rift between iran and turkey.

and the fact of the matter is that events happen, yes, some of them momentous, no question. and these are very uncertain times for them at least. but things will change, and these countries will adapt. and i think there is probably what really exists there is an enduring competition. competition for resources, competition for influence, competition for, um, just to be able to say i am the number one in the region. no question that with the arab spring and the iraq war free countries now have, essentially, been taken out of the current equation; iraq, syria and egypt. so they do not have any influence at the moment. that leaves, essentially, three contenders; saudi arabia, iran and turkey. these, obviously, the saudis are the only arab country. and in many ways the saudis see themselves very much in a do or die confrontation with the

iranians, partially sectarian, partially it's nuclear. they see the emergence of, um, the new iraqi state as a major, major loss for their own strategic position. they resent the fact that here's now a country run by a shia prime minister and has a kurd for a president. and by contrast, they may take some, as we heard from david can, some great relief from the fact that iran's main friend, if you want, ally -- syria -- is in deep, deep trouble and is about the regime may collapse. and with it, of course, that would be a serious blow not just to iran and syria, but also with respect to hezbollah which has been iran's great arm for both deterrence and punishment for

anybody it did not like. so both in syria and iraq you see the saudis at loggerheads. in come the turks, and you can look at the turks as a potential balance. it is, after all, a sunni country. it is ruled by a party that has religious roots, it hassounny -- has sunni in feeling and orientation, but it is also not an islamic country. it is a secular country, and the prime minister went a kind of victory this north africa basically saying that, you know, to -- individuals cannot be secular, but governments and systems have to be secular. so it is a government that is, in turkey, that is actually still a member of the west, has alliances with the west. but it is increasingly playing an important role in foreign policy both in the region and beyond. and, in fact, when you look at

turkish foreign policy, it has really two drivers. number one is that turkey wants to be a important global player. it's not just regional. the region in some ways is a steppingstone for greater glory, if you want. the turks are now part of many international institutions, they're part of the g20 and the security council, they're trying to go back into the security council. they're trying to play an international role. but clearly what has happened in the region, the arab spring, has opened up many new opportunities. the other driver which david alluded to is commercial. and here the turks, when you look at the turkish economy and if you don't have the chart with me, if you look at turkish exports since 2000 -- and this has nothing to do with the akp, it's a transformation that took place in the turkish economy -- it goes up like this. it's almost exponential in terms

of the rate at which it's increasing. and commerce, exports are critical to turkey. so when you look at turkey's no, zero problems with the neighbors policy, in many ways it was driven by this imperative to open up markets, to sell more things to the neighbors, neighbors which had been in this akp government's perception ignored in previous times. and to some extent, this need for zero problems, this need to have, to be able to export your wears has also driven turkey to be really a very status quo-oriented power in the region. it didn't want change, it didn't want chaos. chaos came, but it never sought it. and in part because it didn't want to upset commercial relations. so when you look at turkey's

relationship with india, syria, all those regional countries, it was one of, if you want, not zero problems with neighbors, but zero problems with regimes. it's the regimes with which turkey established relationships, and that's understandable because it is the regimes that control, control all the access to trade. but at the same time, i mean, the turks have proven to be quite pragmatic and adaptable. and when things changed, when relations with israel changed, for instance, they took advantage of it, essentially. they turned that, they turned that deteriorating relationship with israel to their advantage. they used it in many ways to camouflage some of the changes they made in their policy with respect to libya and syria. but nonetheless, they helped, they used it to garner greater sympathy and support on the arab streets. and you've heard of these -- i don't know whether we should

believe them, but there's no question that these opinion polls, especially the ones done recently by the university of maryland, show that both turkey and -- [inaudible] are very, very popular. but the turks have proven to be very adaptable. when they first defended gadhafi and then when things, they realized that gadhafi was a problem, they switched sides. the same thing is happening with bashar assad in the sense that assad was the poster child, if you want to use that expression, for turkey's zero problems with the neighbors policy from enmity to the 1998 they went from almost war to a situation where the two countries were talking about two peoples, one government. so much, there supposedly is so much integration between the two. and yet there was a change. and the change, again, is pragmatism. it isn't that -- yes, a little

bit of -- [inaudible] towards assad, but fundamentally it is a calculation that the turks made that bashar assad is not going to survive. so if he's not going to survive, the sooner he goes, the better it is for turkey. because, after all, a country that is mired in a civil war or in this type of instability is not likely to be a very good trading partner for turkey or any type of partner for turkey. so the sooner bashar goes and is replaced, the the turks can build relationships. essentially, this is exactly the same thing they did with respect to gadhafi with whom they had very, very deep economic and commercial relations. and you see this change also, by the way, in iraq, too, where for many years the turkish government could not even utter the words of the krg. today the kurdistan regional government is one of turkey's most important trading partners. if you go to northern iraq, just

about every other shop is full with turkish goods, turkish banks are there, i mean, everything's turkish. and it is really in both syria and iraq that you see now a freeway -- let's call it competition for lack of better word. that is to say, yes, the iranians and the turks are, have kind of carved up iran -- i'm sorry, iraq a little bit into two zones of influence. in the north the turks are far more prominent, far more dominant. in part because the kurds want it that way too. they see a relationship to the west as the most important link. the south, shia south is, obviously, much more dependent on iran. and the center, of course, is still -- if there is any influence -- the iranians are probably more powerful there. but nonetheless, i think we should not exaggerate either

iranian influence or anybody else's influence in the wake of the american departure from iraq. i think iraq is ultimately going to draw its own, chart its own course. and let's face it, iran/iraq do have bitter memories, there are still border issues, the war, the iran-iraq war as a memory. but the point is that there is competition. and, clearly, the saudis as david also mentioned, the saudis are also involved. and the saudis are trying to support the sunni opposition, if you want. the turks also tried after the election and supported the -- [inaudible] as opposed to maliki. they lost. so that competition will exist. now, before i talk to syria which can in many ways is the most interesting case, and i'll conclude on syria, let me just say a few more things about the

turkish-iranian relationship. the turkish-iranian relationship has gone through ups and downs, but fundamentally it is a relationship that is solid but unexciting. what do i mean by that? i mean, the two countries do have very strong commercial ties. i mean, the turks, the turks have completely energy-dependent on energy whether from russia which is their primary gas supply, iran is the number two supplier. but it's not just, obviously, gas. they also import all their oil. and as the turkish economy grows, that energy need continues to increase. and, therefore, turkey's not in a position to alienate the iranians on energy. not that they can -- similarly, the iranians have already built the pipelines. pipelines are not like tankers. they can't just shift their destination from one day to another. this is at some cost. so both countries know that they

have to coexist with each other. there have been times when the turks have been very nice to the iranians. the turks never criticized in spite of the no problems, zero problems with your regimes, enabling regimes. they never criticized the 2009 elections. they were with putin and chavez the fist to congratulate -- first to congratulate ahmadinejad on his glorious victory. they, during the pressure on the united nations when they were on the security council, they came up with a tripartheid agreement with the brazilians that really upset the united states and creates a huge crisis with -- created a huge crisis with the united states here. but on the other hand, you see, for instance, that the iranians are now supposedly unhappy about what the turks are doing in the arab spring, especially what they're doing in syria. i'll come back to that in a minute.

and we also heard mention of the defense, the radar that the turks put, and we've heard iranian officials saying if there is an attack on iran, one of the first targets of the iranian retaliation will be where the radar is going to be. but you have to understand, there is no radar at the moment, and god knows when that radar is going to come in. so they will be bombing empty places. but let's face it, if you're an iranian, do you think that the turks had a choice when it comes to the radar? because had the turks said no to the radar, it would have created such a crisis with the united states and the west, it would have been the only country in nato that would have gone against nato consensus, but it certainly would have gone against the united states. and given because of the israeli relationship, begin some of the tension that exists in the city, that would have played right into the hands, um, of -- so the iranians understand that.

so, yes, they will make some noise about it, but i don't think it was ever a serious issue. but syria. okay, syria's the most important, will be the most important test of turkish-iranian relationship because in syria, clearly, i don't need to -- and trita, i'm sure, is going to talk about this -- syria's too critical for iran. and the loss of syria would be devastating because it also stops access to hezbollah. it isn't so much that the turks have taken a position against bashar. it is also the fact that they are actively now engaged in undermining bashar. the syrian opposition has offices in us tan ball, the turks have been instrumental in helping this opposition come together. they have engaged in some, some sanctions. but they have, in many ways, it's like the turkish position on bashar, erdogan's decision to

support the overflow is like the good housekeeping seal on because they were so close. i mean, these two leaders were really part like one family. so for erdogan to turn around 180 degrees and go after bashar, basically, says, bashar, you really don't have any legitimacy. he really in that sense carries much more weight, and this is what's probably upsetting the iranians even more. but the question is, if there is a civil war in syria, what will the turks do? will they intervene militarily? will they be a conduit? let's not forget that turkey because of its long border -- and i would say not just its land border, but also think about the proximity of the coasts -- turkey is the only country that can play a very active role in the event of the decision to intervene militarily or a civil war, etc. and that's when, i think, the rubber will hit the road, and we'll see whether the iranians react against turkey and whether

that relationship become one of enmity. thank you. >> thank you very much, henri. trita? >> thank you. thank you so much, haleh. a great pleasure being here. thank you for the kind invitation. as always, you pick the timeliest issues to discuss, and the question of turkey, iran and sabia is critical due to their role in shaping the regional security architecture in the region. and my talk will focus primarily on looking at this from that geopolitical perspective. if we take a look at the region, we see that iran has been a longtime opponent of the status quo and the american-led security order. long harboring aspirations for regional preeminence, the current order or what little is left of it is undetectable to iran's interest. it's an order favoring western-oriented states and that tends to punish any opposition to american leadership or to israeli interests. um, and though one of the most powerful states in the region,

iran is not part of any security arrangements within the region. it has no pacts, it is not part of any security body. in fact, most of the security bodies and pacts in the region tend to be created in order to balance and contain iran. so iran has no voice, it has no seat at the table, and if you are not at the table, then you are essentially on the menu or at least that's the way the iranians view it. [laughter] as such, the iranians have welcomed american decline in the region and taken advantage of washington's many mistakes in the last couple of years. in the period prior to 2009, the iranians managed to expand their influence in the region both by filling the vacuum created a decline in american power, but also by expanding it soft power base, by challenging very vocally an increasingly unpopular america in the region. on the other side of the spectrum, you have saudi arabia, a key benefactor of the old american order.

it is an order that has crumbled, and as washington has come to recognize that the status quo is not sustainable or tenable, saudi arabia along with israel has emerged as the two states that are most adamant that pressing the united states to resurrect the old order o. because the old order brought with it several dividends that were beneficial to the saudis. it's an order that contained iraq, it's an order that contained iran, it made sure that the west backed the pro-wen governments in the region -- pro-western governments in the region in spite of their lack of domestic popularity or legitimacy. it's also an order that made sure that the american-saudi relationship was on a very strong footing and that these paid some nominal, um, call for a resolution of the ace israeli-palestinian conflict. it's an order that created a division between the so-called moderates and the radicals in the region in which saudi arabia very generously was put in the

definition of a moderate state. but since the invasion of iraq most of the deliverables of this order has, essentially, evaporated. iran has been unleashed as a result of the defeat of saddam and the taliban. iraq has fallen into the hands of a pro-iranian shiite regime, at least that's the way saudi arabia tends to view it. washington has in the eyes of the saudis betrayed its long-term allies, long-standing allies in the region by siding with some of the pro-democracy movements. and all of which has resulted in significant tensions between the united states and saudi. if defining delineation of the region becomes -- and i'm not saying it's becoming this, but if it does become based on whether states favor democratization or not in the region, then that would mean saudi arabia would be squarely on the wrong side of history, at least according to the definition by president obama. turkey, on the other hand, is a more complicated case as henri

said. while saudi arabia was a pliant ally of the u.s. who only began openly defying washington once it deemed obama had abandoned the desire to resurrect the old order, turkey has been a pretty loyal ally that only turned defiant and assertive in order or to hasten and secure a strong position in the new order once it felt that the united states no longer had the ability of turning the clock back. its current position is largely driven by washington's ability to restore to order is lacking. and now turkey sees in this transition, henri pointed out, in the arab spring an opportunity for itself to expand its leadership and fill some of that vacuum. and there i think it's oftentimes been viewed as if turkey, perhaps, has become a lost ally or perhaps a pro-iranian power whereas in reality it seems much of turkey's positioning in the region has been aimed at countering iran's attempts to

turn the post-american order into a pro-iranian order. recognizing the propensity for a hostile rivalry with iran, turkey has sought a balance that by expanding as many areas of cooperation with iran as possible. as ancient rivals, the turks recognize that the damage this rivalry could do to turkey's continued rise, and as a state with a foot in europe, it also recognizes the benefits that come by transitioning the security paradigm in the region towards collective security. something that would insure that while you cannot eliminate rivalries, you can make sure they turn less destructive. the upheaval in the region in the last year has put the existing tensions and the divisions between turkey, iran and saudi arabia to the fore. saudi arabia's quiet quest to contain and box in iran is now in the open. private conversations about cutting off the head of the

snake seem increasingly part of public policy, particularly now when saudi arabia actively is using the oil weapon against iran. turkey's no problem policy in an attempt to maintain a healthy balance between corporation and competition with iran has essentially prematurely ended as a result of what's happening in syria, henri also pointed out. and iran's endeavor to use its hard and soft power to clinch a leadership role in the region in the aftermath of america's exit has fallen behind due to its own treatment of its own pop ration in 2009 -- population in 2009 and the depletion of iran's regional soft power. tehran, in many ways, is a regional state that has lost momentum, and i think there's a few things that can be said about tehran's reactions, calculations and maneuvering as a result of the strategic disor yenation. after initially underestimating turkey's content and capacity, iran is now recognizing that you are the can key actually can and is putting up a very potent

ideological challenge to iran's leadership in the region. while iranian leadership wrested on the idea of islamic resistance against an increasingly less relevant west, a choice that enjoyed maximum popularity and support as long as the rifts between the populations and the regimes were at the greatest and at a time when iran was one of the few states that adopted a defiant position vis-a-vis the west, turkey's assertiveness and bid for leadership rests on its economic policies and progress and its ability to combine a sec tar, democratic political system with a strong islamic identity. tehran has, in a way, been a little bit taken off guard by the rise of turkey. and you can increasingly see anti-turkish, anti-erdogan articles in the iranian press accusing ankara of pursue ago neo-ottoman policy, an argument you also hear in some quarters in washington. and tehran is increasingly putting turkey rhetorically in

the same cap as israel and saudi arabia both to warn ankara about the folly, in their view, of putting its eggs in the western basket at a time of american decline, but also to discredit turkey a bit in the regional audience by lumping it together with israel. moreover, you also see that there's been some indications of closer cooperation and coordination between iran, china and russia. particularly after the way libya ended. the russians and the chinese have no interest in seeing the arab spring morph into an opportunity to expand a number of pro-american regimes in the region. their interest lies in assuring there is a maximum amount of independent states in the region, and as a result, seeing states such as syria or iran becoming targets is not something that the russians and chinese would view lightly. take the veto against the syria resolution, the security council, as a case in point.

this has enabled closer coordination between tehran and moscow, you can particularly see that over syria. whether it's long-lasting or not e are mains to be seen. i would make the argument that tehran realizes that it faces few short-term opportunities to expand its influence. in the short term, iran is on the defensive. it's on the defensive vis-a-vis turkey, it is on the defensive vis-a-vis saudi arabia, it is to some extent vis-a-vis the united states, and it certainly is on the defense vis-a-vis the situation in syria. but being on the defensive is not necessarily the same as assessing themselves as being weak. on the contrary, i think the iranians are adopting a longer-term view where they count on the short-term setbacks of what is happening in the region to be offset by the regional state's natural gravitation away from the west in the long run and towards more independent postures, particularly if national islamic movements continue to score

victories at the ballot boxes. that is, at the end of the day, the way the hard liners in iran predict that the arc of history will bend. i'll stop there. >> thank you. thank you very much. we open the floor now. david, question to you. after whole incident when the iranians were trying to assassinate the saudi ambassador in the washington, the iranians came out and denied it. and just last week the iranian intelligence minister went to saudi arabia. i mean, what do we hear from the saudi side? the iranian side, i believe, trita, was relatively quiet about this trip, and it came out first in the arab press. and then the iranian had --

[inaudible] what, why did they -- what is the read of the saudis? >> you know, i haven't heard anything about what the saudi read on that meeting is. but the saudis and the iranians have even when relations are really bad have always kept lines open. and we've just seen the two of them cooperate on opec. despite their differences. and they will continue to exchange messages and talk to each other when things are really so serious that they're so in danger of conflagration. but whether or not it's true that they did try to assassinate the saudi ambassador here, i think the saudis have a mindset that things like that are to be and expected from the iranians. >> trita?

>> um, no, i think you're absolutely right. this was a very controversial visit in tehran and did not necessarily have the full support of the political establishment. part of the reason why it wasn't initially written about. um, there was a fear that this would come across as if iran was the weaker party by sending him there. there was actually another visit by a deputy foreign minister, i believe, that was supposed to take place that the saudis canceled. um, but i think one of the outcomes that the iranians view it is, actually, the collaboration in opec that took place, and one of the factors that, apparently, led the iranians to believe that they could go there with somewhat of a strong card was because of the drone situation in which the iranians were turning to their benefit in the conversations with the saudis. >> um, you care to comment on each other's presentation? >> no. the only thing i would say in terms -- one thing i wanted to say about the turkish position

in general is i think the turks kind of enjoy the fact that the iranians are on the defensive. the more the iranians are on the defensive, the more the iranians will need them, and that's exactly where the turks want the iranians. so although, although the turks have been very explicit in their opposition to any kind of reaction on iran, for that matter they also say the same thing for syria, but the fact of the matter is i think they like the fact that the world is, essentially, ganging up on iran. and that will mean that the iranians will need turkish goodwill more often, and there's going to be a price for that. >> david? >> just, um, i am not a proponent of the american decline in the middle east. i have been wandering around the middle east since 1960, and i never thought i would see the day when arab countries called on nato to come in and overthrow an arab leader led by the two

former colonial powers of the middle east, britain and france, and with the united states doing all the logistics, etc. i mean, that, to me, is just an extraordinary event, what happened in libya in terms of not the decline, but the return of american influence to libya. and the calls for no-fly zones, i just came back from khartoum, sudan. the opposition there is calling for a no-fly zone. some of the syrian oppositions are talking about it. there seems to be no hesitation to seeing the west get revolved in the helping solve some of these problems. when it comes to the gulf, the united states has just signed a $60 billion arms agreement with saudi arabia, the largest in its history. we are going to be providing arms to every part of the saudi military. this is an extraordinary development.

the gulf cooperation states have just agreed finally to set up an integrated early warning, um, anti-missile system to protect them from iran. the united states is providing the equipment. the expertise, the training and, i suggest, probably the running of this integrated anti-missile defense system for some time to come. so i don't see america in decline in the middle east. it's taking different forms, it's -- we're trying to go from one type of relationship to another. but iran has, particularly in the gulf, iran has really cemented the u.s./gcc council relationship. >> we're opening the floor to your questions. yes, please. can you, please, wait for the

mic and identify yourself. thank you. >> [inaudible] international petroleum enterprises. thank you all for the wonderful presentation. david correctly talked about the zero problem policies of turkey, but i'll suggest that saudi arabia has, basically, had similar type of policy under, um, when abdullah was actually crown prince. he had a rapprochement with iran after khomeini was elected in '97, tried to resolve land issues with other neighboring countries, with oman, with yemen, with uae, with qatar. so, um, we see quite a different abdullah now, and the policy, the shift is unbelievable. it's very similar to what we see in you are the can key. it looks like -- in turkey.

it looks like there is a match there. but as far as, you know, turkey's concerned, yes, we've seen some sharp moves by the prime minister there, and i'm not sure if it's going to be well taken in the arab world. basically, they would probably see it as a very opportunistic move by turkey in that case. but as far as the popularity, yes, he's more popular, but so was ahmadinejad before the 2009 election. so the durability of that, i think, is kind of questionable. as far as turkey itself is concerned, no one really mentioned the major problems that they have with their own citizens, with the kurds, that they don't even, you know, consider as first class citizens. but they also have major

problems. you mentioned the at toman problems -- the ottoman problems and so on, which is true, but they have not been welcomed by the europeans, and they would never be welcomed by the europeans. but, also, when, with the fall of the former soviet union, they were basically rejected in, you know, other areas in the region, in the central asian republics, basically. so, in fact, i think iran is probably their best option and their very natural ally, it seems. >> i'd like to take your input on that. >> david, we'll start with you and have each -- >> i'm not quite sure what the question was. >> iran is the most natural ally -- >> the arab world today because of what's going on in iran is more than ever today sunni versus shiite. and that's the way, unfortunately, you might well

argue the way the saudis are reading the whole struggle in the gulf. i'm talking about the gulf in the levant, not the maghreb. and that's the way the saudis have decided to play the game. and they're turning it into a sunni/shiite struggle. and they're not going to allow shiite iran to make any more gains. that's why they sent troops into bahrain. if they can possibly help it. in fact, they're trying to reverse the whole trend. so from the saudi point of view, the sectarian nature of rey'all politic in the gulf arab world is what dominates. >> henri? >> um, look, when it comes to turkey being opportunistic, um, i don't think there's anything wrong with adopting such a policy. i mean, you try to make -- if you have lemons, you try to make

lemonade with it. so i don't necessarily think it's necessarily a bad thing. however, when you look at the arab reaction to this, i mean, there is, there might be some reaction to turkey, to turkey. however, what the turks have done, and i will argue that had it not been for the break with israel and not just the break, but the stringent, or the diatribe against israel, the delegitimization of erdogan, without that which provides essentially an overarching or a camouflage if you want, turkey would not have had that much ease in terms of shifting policies in the region. that gives it a lot of maneuverability. so, yes, there's a lot of opportunism, but they use it very well to their advantage. >> tee that? -- trita? >> i would agree that the turks are going to go to quite an extent to avoid any real open hostility with iran.

whether they would view iran as a natural ally or not, i'm not so sure. it's a very different turkey today than the turkey you had 10, 15, 20 years ago with some of the experiences that you mentioned. but i think one of the common threads, perhaps, that both turkey and iran face is exactly the type of framing of the region that david presented. that the saudis have been able to drive a very, very hard gamble on dividing the region between sunni and shia. and in iran we've seen similar attempts to divide the region between arabs and non-arabs. if you burr sue that frame -- pursue that frame, turkey also ends up becoming on the outside of the region. the saudis often times talk about the iranian influence being illegitimate in non-arab affairs. these type of delineations of the region are going to be problems both for iran and for fur key. i don't think -- for turkey.

it does show some of the weaknesses of a longer-term partnership between turkey and saudi arabia. >> yes. >> i just want to add one thing. there's one very odd policy position of the turks given how now they've sided with, essentially, all the -- in favor of change in the region, arab spring. that's bahrain. they have said absolutely nothing about what's going on in bahrain, the saudi intervention in baa ray. so, in -- bahrain. >> essence, maybe they're buying what david is talking about, that sunni/shia divide, again, is very pragmatic because who cares about bahrain? it's tiny, not that important, and saudi arabia's much more important. >> yes, please. and then -- if you could wait for the mic and identify yourself, and then the gentleman, yes. >> david rogers, independent

historian. one of the arguments one hears frequently in the iranian nuclear debate is that if iranians get nuclear weapons, various other regional powers will start trying to get the nuclear weapons too. is this a given, or is there, or are there other possible alternatives to what the regional powers, regional countries will do? i'd like your take on this. >> getting nuclear weapons is not very easy. i mean, you don't go to kmart and buy one. but the -- >> [inaudible] >> right, that's what i was going to say. [laughter] >> maybe that's walmart. so the saudis may have that option. we don't really know what the arrangement is between the saudis and the pakistanis. but when it comes to the turks,

i mean, the turks don't have a nuclear power plant yet. so if you're talking about building, getting a nuclear weapon, you're talking a very long gestation period. they have to build a power plant first. that will take ten years. secondly, the turks do have the nato umbrella. there are 60 tactical weapons today on the nato and united states guidance in turkey. so, technically, they are covered by the nuclear umbrella which also allows them to be far more -- when you ask the turk leadership, yes, you believe in a nuclear-free middle east, does this mean you're ready to get rid of your 60 weapons? they say, no. from that perspective they have their cake and they're eating it at the same time. >> trita? >> let me just add to that. i think there is a risk if or that, and i think it is one of the factors as to why it is important to address the iranian nuclear challenge with a lot of

good insights and foresight. but i think, also, it is one of the weapons that are used by the states that do want to see the united states to take on a tougher position vis-a-vis iran to start making indications that they're also looking into their own nuclear program. because that then immediately feeds into the argument we're seeing post-iranian proliferation, and as a result it is critical to prevent that by taking on a stronger position vis-a-vis iran. but again, at some points, of course, for political reasons it may be a little bit exaggerated, but i don't think it is completely unfounded. >> [inaudible] yes. here. >> thank you. ahmed from the wilson center. my question will be related to the first one, you know, going back to the sectarian division problem and kind of two related

questions. the question of syria, how assad is really playing the sectarian card and to what extent, um, do you think he'll be able to, you know, continue his position, maybe even strengthen his position by playing the sectarian card rather than the popular demands of changing this regime. and related to the second aspect is how saudi arabia plays the wahhabi actors not just in the area, but all over as a force of anti-shia propaganda. to what extent do you see that as a force that saudi arabia can play against iran not only in the region which, clearly, is as we see with the rise of movements in egypt and other places, but to what extent do you see that as a rival sort of tool of policy? thank you. >> you know, assad has turned to playing the sectarian card. i think for two reasons. one is he's trying to consolidate his own power.

we're all in the same boat. don't think by getting rid of me that you're going to solve the problem between shiites and the majority sunni population in syria. so he, too, has started playing the ectarian card. sectarian card. just like the saudis are. but for different reasons, obviously. um, the saudis are trying to mainstream what has wahhabiism g the mainstream thinking. it's a very strong part of their bid. i mean, there's this whole religious war between iran and saudi arabia, one the leading shiite power and the other is, the saudis, custodian of the two holy mosques. so it's very intense, and it has been since 1979. and the saudis play it all the time.

then they try and have a national dialogue at home to relieve the tensions between sunnis and shia which is kind of ironic, but they have this national dialogue going on, and they're trying to get the two -- so they're going in two different directions on this. >> trita? henri? we have 35 people in the overflow, so i'm taking one of their questions. it's to all three of you. have the influences of individual imams, islamic religious leaders, increased on any of the governments of saudi arabia, iran and turkey? henri? start with turkey? are they religious -- >> i mean, in turkey you have, you really don't have any important religious leaders except for one, and that is minute by the name of -- [inaudible] who happens to live in

pennsylvania, united states. and has an enormously large following and has media enterprises, businesses, associations. and by and large, the organization although does not agree with the government all the time, has sported the akp and has been actually quite helpful to akp's success. but this is -- they were influential before. what the difference between now and pre-akp is now they are much more legit out in the mainstream, and they don't have to hide. >> [inaudible] >> in iran you actually have a situation that is somewhat the opposite. i think though it's very difficult to make very clear cut predictions of exactly what the power balance is between various, um, power centers in the iran, i think a trend that has been viewed over the last 15 years is actually a decline of the influence of the clergy at the expense, of course, of some

other elements such as the irgc, etc. this doesn't mean that the irgc is necessarily controlling the country, but it seems to have been a trend away, and you can see greater dissent in bloom against khomeini and the current interpretation. you have worries in if iran of what will happen in iraq, and will najaf be able to emerge as a shiite ideological challenger? you already have a situation in which there's very little following in najaf for the kind of iranian interpretation of the mainstream shiite school of thought. so i think you've actually seen an opposite trend there. it's not necessarily sufficient to say that, you know, the regime is about to collapse or anything of that kind, but it is, nevertheless, a different iran compare today 15 years ago. >> david? >> i'd say the influence is sort of the same ambiguous relationship, the saudi family

has had with the sheikh w the descendants of mohamed -- [inaudible] they sometimes, the officials establish, wahhabi establishment there is subservient to the government, helped the government battle al-qaeda in extremism, islamic extremism inside the kingdom. it's been very helpful to the government in that way. on the other hand, they fight each other over whether women should be able to drive, whether there should be an overhaul of the education system. so nestically you get, you get -- domestically, you have a struggle going on between the direction of a number of whether women should be allowed to have sports in their schools. laugh can you believe it? --

[laughter] can you believe it? that sort of thing. they're really embattled with each other. >> yes, please. just the mic, it's coming. thank you. >> joel barkin, csis. none of you have mentioned the word egypt in an hour and a half, okay? [laughter] apologies. in passing. [laughter] could you then review the three straits vis-a-vis egypt and particularly their take on the outcome to of the elections? >> you want to go? [laughter] >> i think the saudi, you know, the saudis want to see stability in egypt. they're not crazy about democracy, obviously. in fact, they used to have strong support from mubarak in struggling with the united

states that was trying to push democracy on both of them. i think they're very worried about stability there. i think they would prefer to see the military stay there and play, continue to play -- they would hope -- a stabilizing role. now, we're not so sure that they can play a stabilizing role. but that they'll, they would side on having the military stay , and, you know, they've committed $4 billion since this all began to egypt. so far they've given half a billion dollars to help them with their financial situation which is far from what the egyptians need, but they've committed to putting in up to two billion of the four billion into stabilizing the financial situation of the country. so they're not, you know, not

trying to isolate egypt. now, the elections, the way they're going, it's going to bring the muslim brotherhood is going to have the plurality of votes and will probably lead a coalition government. the relationship between the saudis and the muslim brotherhood is extremely ambiguous. the muslim brotherhood during the first gulf war sided with saddam hussein. this really infuriated the saudis who had taken in thousands and thousands and thousands of muslim brethren in the '50s and '60s after nasser turned against the muslim brotherhood. so here they had sheltered the muslim brotherhood for decades, and they felt betrayed by the brotherhood during the first gulf war. furthermore, they blamed the muslim brotherhood for politicizing islam and creating

what some people call neo-wahhabiists which are a mixture of wahhabis and muslim brethren, but very politically minded. so i don't think they're happy to see the muslim brotherhood win as big a vote they've gotten. on the other hand, i think they're happy to see the sol mys doing so well because many of the sal mys owe ideological allegiance to the wahhabis in saudi arabia. >> erdogan famously, as you know, called on mubarak to step down, and he was seen as one of the first western leaders to do so. there was never much love lost between mubarak and erdogan