Europe debt crisis poses risk to U.S. banks: Fed paper

(Reuters) - The European debt crisis puts U.S. banks at risk of financial contagion, and a "disorderly outcome" threatens the ongoing U.S. economic recovery, the San Francisco Federal Reserve Bank said in a research note on Monday.

If Europe's debt problems remain contained across the Atlantic, the U.S. economy will likely grow at a 2.9 percent pace this quarter, falling back to 2.4 percent next year and picking up again to 3.1 percent in 2013, wrote Sylvain Leduc, a research adviser at the San Francisco Fed.

Inflation, he wrote, should settle at about 1.5 percent next year and 2013, undershooting the Fed's preferred target of 2 percent or a bit below.

The forecast puts the Fed's westernmost outpost on the pessimistic end of Fed projections, whose central tendency view on GDP growth next year ranges from 2.5 percent to 2.9 percent, and of inflation in 2013 from 1.5 percent to 2 percent.

The European debt crisis, however, "poses a substantial downside risk to our forecast," Leduc wrote.

"U.S. banks have mostly shed their direct exposure to European sovereign debt," Leduc wrote in the regional bank's latest FedViews publication. "But they remain subject to the risk that European trading counterparties might not be able to meet their obligations."

In addition, if the European bank crisis is not contained, banks could face a deepening liquidity crunch. "Such acute financial distress could derail the ongoing U.S. recovery," he wrote.

Fed officials have expressed increasing concern over Europe's inability to bring its debt problems under control, though the president of the Richmond Fed, Jeffrey Lacker, on Monday said Europe's problems should not derail the U.S. recovery.

For the FedViews paper, please see here

(Reporting by Ann Saphir; Editing by Leslie Adler)