Former Fed chairman Alan Greenspan suggested that the crisis potentially could push the United States into a second recession.
Fed keeps wary eye on Europe
Debt crisis seen as potential threat
WASHINGTON — If the US economic slowdown weren’t enough to deal with, the Federal Reserve this week must consider a new threat: a resurgent European debt crisis that could imperil the global economy.
Financial markets have been gripped by fears that Greece will default on its debt. Other European nations with heavy debt burdens, such as Ireland, Portugal, Spain, and perhaps Italy, could be at risk, too.
When they meet today and tomorrow, Fed officials probably will discuss what they might do to help shield US banks and a still fragile US economy if Europe’s crisis worsened. Some analysts suggest that a panic would cause the Fed to intervene as it did during the 2008 financial crisis, when it lent billions to banks.
“The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis did in the United States,’’ said Sung Won Sohn, an economics professor at California State University. “If it spreads to Spain and Italy, then the global economy could be facing huge problems.’’
Once its meeting ends tomorrow afternoon, the Fed will issue a statement that’s likely to say it will leave a key interest rate at a record low near zero for “an extended period.’’ Many economists say the US slowdown means the Fed won’t start raising rates until the summer of 2012, about six months later than many thought when 2011 began.
Later in the afternoon, the Fed will update its economic forecasts. And then chairman Ben Bernanke will hold a news conference, his second session with reporters under his new policy of holding regular news conferences for the first time in the Fed’s history.
When the European debt crisis surfaced in the spring of 2010, Bernanke told Congress that it probably would have only a modest effect on the US economy as long as Wall Street stabilized. He said that the Fed would monitor the developments and their potential effects on the US economy. At the time, the Fed opened a program to ship dollars overseas to pump more cash into the financial system and give European central banks enough dollars to lend to commercial banks. In return, the Fed received European currencies to hold until the dollars were repaid.
The Fed could resume that effort if the European crisis worsened. It could also pursue stepped-up lending to financial firms through its emergency loan program, called the discount window. And it could resume the unorthodox loan programs it used during the financial crisis when credit froze up.
Former Fed chairman Alan Greenspan said in a television interview last week that the likelihood of a Greek default is so high “you almost have to say there’s no way out.’’ Greenspan suggested that the crisis potentially could push the United States into a second recession.
Still, economists say they expect no major announcements from the Fed this week. Rather, they think Bernanke will signal that the Fed is following events in Europe and would coordinate a response with the European Central Bank should the crisis deteriorate.