Friday, July 1, 2011

A Domino Effect: What Happens in Greece Comes to America?

It is but one year later and Greece is in trouble again. Investors are currently concerned that if Greece defaults on its debt, financial hardship could hit a lot further than its home economy.  Speculation in the media suggests that this turmoil would spread to other troubled European economies – Spain, Portugal, and Ireland at the lead. Moreover, this possible financial collapse may stretch even further, all the way to the American coast.
Let’s look at the numbers. Greece is currently 340 billion euros ($481.5 billion) in debt. This is more than 30,000 euros per person in a nation of 11.3 million.  

But how can havoc in this southern European nature trouble Americans? ABC News lists a variety of effects that the default in Greece can cause, and none of them are pretty.   2
The top concern is this: If Greece defaults on its debt, any unit that bought bonds (banks, governments and private investors, for example) would suffer major losses to their balance sheets. Capital that might have been used to spend elsewhere, will no longer be available to leverage.

Following suit, if the European countries come to an agreement to bail out Greece, a hefty bulk of money will flow out of these nations and into the shaky Greek economy. This, in turn, will lead those countries to have less money to spend on American goods and services.

And, as the U.S. knows all too well, if Europe is in shambles and unable to purchase our products, job losses might accelerate here over the following months. Ironically enough, reports from the Associated Press, say that fewer people applied for unemployment benefits last week, though applications remain elevated. Economists at are also reporting a decrease in
credit card applications in comparison to consumer real spending(see graph.) But though this nation is doing slightly better, the potential of Greece defaulting might prompt credit markets here to ice over, as happened after Lehman's collapse when banks virtually stopped lending to each other.   

According to Reuters, the White House said yesterday that the Greek crisis was acting “…as a headwind to the U.S. economy.” Opinions however are varying as to the level of exposure for the U.S. banks.  

“Large European banks are very intertwined with American banks,” Richard Bove, an analyst at
Rochdale Research, told ABC News. “The question becomes, in the worst case scenario -- a wave of defaults. "Will these banks be able to absorb a number of defaults from a number of countries?” Bove asked.

Next week, European leaders will convene a summit to attempt to deal with the crisis, and another meeting is set for July 11.   

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