So far, the Greek Prime Minister George Papandreou, a Socialist, has survived a vote of no confidence and now is in the process of cutting the nation’s budget deficit in order to qualify for bailout funds from other European nations.
But the prospect of a default has roiled US financial markets for six weeks.
At his press conference on Wednesday, Fed Chairman Ben Bernanke described how the nation’s central bank has pored over the assets of US banks and decided everything is OK – at the moment.
Mr. Bernanke says the Fed asked the banks to “essentially do stress tests” – computer simulations – to see what would happen to their capital if Greece defaulted on its loans.
“And the answer is the effects are very small,” he said.
Bernanke says the Fed is also monitoring the impact of the European debt problems on US money market mutual funds. “The situation is similar in some sense, in that, with very few exceptions, the money market mutual funds don’t have much direct exposure to the three peripheral countries [Greece, Portugal and Ireland] which are currently dealing with debt problems,” he said.
However, he says, the money market funds do own a substantial amount of debt issued by banks in core countries such as Germany and France. That is the reason, he said, “why the Federal Reserve and other regulators are continuing to look at ways to strengthen money market mutual funds.”
The European financial crisis is unfolding against a backdrop of somewhat slower economic growth than the Fed had expected. However, Bernanke has maintained the slowdown is temporary, the result of problems automobile manufacturers have had getting parts from Japanese companies affected by the tsunami and economic headwinds that have slowed consumer spending due to higher energy and food prices.
“We do believe that growth is going to pick up going into 2012, but at somewhat slower pace than we had anticipated in April,” he said. By 2013, the Fed expects the economy to be operating at a faster pace.
Bernanke said, however, the Fed was not exactly sure why the economy is not currently moving faster. He suggested some of the headwinds could be related to weakness in the financial sector, housing problems and Americans still reducing their debt loads.
“Some of these headwinds may be stronger and more persistent than we thought,” he said, adding they might still be operative next year.
Bernanke’s press conference and economic projection followed a meeting by the Fed’s Open Market Committee, composed of Fed officials who set interest rate policy.
As expected, the Fed decided to keep the target for short-term interest rates at zero to .25 percent. It also said at the end of this month it would complete its planned purchase, which began last fall, of $600 billion of longer-term US Treasury securities to bolster the economy.