By Bob Willis

May 6 (Bloomberg) — The Greek debt crisis will probably trim U.S. economic growth, prices and interest rates over the next couple of years, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

A 10 percent drop in the value of Europe’s single currency, the euro, will hurt U.S. exports and boost imports, reducing growth in the world’s largest economy by about 0.3 percentage point a year over the next two years, Feroli said in a note to clients yesterday. The euro has dropped about 15 percent since late November on mounting concern the crisis will spread to other European nations.

“If things don’t spin too far out of control, the impact should be manageable for the U.S. economy,” he said in an interview from New York.

The influence on the U.S. economy will be both direct and indirect, Feroli said. The direct effect will be on trade and incomes, while the crisis will indirectly prompt the Federal Reserve to hold interest rates down longer than they otherwise would as growth and inflation cool, he said.

The same 10 percent decline in the euro would cut about 0.1 percentage point from the Fed’s preferred price gauge, which is tied to consumer spending and excludes food and fuel costs. The measure climbed 1.3 percent in the year ended March, less than policy makers’ long-term projections for gains in the 1.7 percent to 2 percent range.

“With the economy operating well below capacity and deflation a serious risk, a crisis-induced rise in the dollar would not be a welcome development,” Feroli wrote.

Banking System

U.S. banks have $16 billion outstanding in credits to Greece, $5 billion to Portugal, $57 billion to Ireland and $58 billion to Spain, he wrote, citing data from the Bank for International Settlements. That doesn’t include indirect exposure through non-banking institutions and through European banks in the major euro countries such as Germany and France, he wrote.

In a worst-case scenario, the debt crisis would cripple the European banking system, hurting the global economy.

“The experience of the past years has caused us to be sensitive” to the less-likely scenarios, Feroli said in the interview. “You can imagine scenarios that get bad enough where it actually causes the U.S. economy to contract. It would have to get pretty bad in Europe and pretty bad in the European financial system but it’s not inconceivable.”

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net.

Last Updated: May 6, 2010 00:02 EDT

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