By Steven K. Beckner

CHICAGO (MNI) – With the U.S. economy still struggling to recover
from a mortgage securitization-induced financial crisis, Federal Reserve
Chairman Ben Bernanke will be speaking Thursday morning in Chicago amid
ominous financial threats from another source.

Bernanke is addressing the Federal Reserve Bank of Chicago’s 46th
Annual Conference on Bank Structure and Competition. His announced topic
is the “Supervisory Capital Assessment Program” — better known as the
“stress tests” which banks now must undergo to determine whether or not
they have adequate capital.

He is speaking as Congress wrestles with complex and controversial
financial regulatory reform legislation.

But Bernanke may well be asked about other things, notably the
renewed financial turmoil growing out of the Greek debt crisis and its
impact on the U.S. banking system and economy. U.S. firms have limited
exposure to Greek, Portuguese and Spanish debt, but there is “a whiff of
fear,” as MNI’s Denis Pettit described it, in markets worldwide which
the United States has not escaped.

The SCAP or “stress tests,” which led to large infusions of capital
into the largest banks last Spring, are intended to measure whether
banks have sufficient capital to weather worse than expected economic
and financial conditions.

Certainly, few expected the Greek government’s profligate fiscal
policies to lead to a debt crisis that threatens to undermine the
financial stability of the euro-zone and have repercussions around the
globe.

It remains to be seen just how extensive the shock waves are and
how they affect the economy, but the Fed is keeping a close eye on the
situation and, no doubt, staying in close touch with the European
Central Bank.

The ECB has suddenly found itself back in crisis response mode. It
has already agreed to accept Greek government bonds as collateral for
loans and may be forced to take other emergency steps.

For the Fed, the crisis has meant a strengthening of the U.S.
dollar and a decline in dollar market interest rates with divergent
economic implications. It makes the Fed’s task of devising an
appropriately timed “exit strategy” that much more complicated.

Just last Wednesday, the Fed’s rate-setting Federal Open Market
Committee announced that it was keeping its federal funds rate target in
a zero to 25 basis point range and reiterated its expectation that it
would stay “exceptionally low … for an extended period.”

But much has already changed in the past week, with the
unanticipated intensification of the Greek debt maelstrom, which
threatens to become a much broader crisis.

A mere three days ago Greece got a $141 billion loan from other
euro-zone nations and the International Monetary Fund.

But on Wednesday doubts about Greece’s will to take promised fiscal
austerity steps, about Germany’s contribution to the bail-out and about
other southern European nations’ ability to service their heavy debts
triggered a frantic flight to safety.

The euro, which traded above $1.45 earlier this year, broke through
another major support level on the downside, falling under $1.29 to a
one-year low near $1.28.

As investors fled stocks and all assets perceived as risky into
U.S. Treasury securities, the yield on the 10-year Treasury note, to
which many mortgage rates are tied, fell near 3.5%. It was 4% just a
month ago.

While lower rates could boost housing, the impact is not all
positive, even though U.S. exposure to European debts is modest.

If the European economy slows while the dollar strengthens, U.S.
exports and in turn the whole economy may suffer. The only question is
the extent to which domestic demand from consumers and business has
gained enough traction to sustain recovery at a pace sufficient to
generate jobs and bring down unemployment.

An always somewhat chancy proposition may have become more so in
the last few days.

** Market News International Chicago Bureau: 708-784-1849 **

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