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 Tuesday and Wednesday, Fed officials will likely discuss what they might do to help shield U.S. banks and a still fragile U.S. 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."
When the European debt crisis first surfaced in the spring of 2010, Bernanke told Congress that it would likely have only a modest effect on the U.S. economy as long as Wall Street stabilized. He cautioned that the Fed would monitor the developments and their potential effects on the U.S. 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 Sates into a second recession.
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