World debt crisis: eight reasons you should care
As the world starts to focus on its debt crisis, Greece's financial woes may presage problems to come in Europe and the United States – with implications for your bank account and stock portfolio.
It's a sign of the fragility of the world economy that the debt problems of Greece, a nation the size of Ohio, can throw global markets into turmoil, cause a run on one of the world's premier currencies, and call into question the viability of the European Union.Skip to next paragraph
Subscribe Today to the Monitor
That's not all. Some see the tremors emanating from Athens as the precursor to a debt earthquake that could engulf much of the developed world.
If Greece today, who will it be tomorrow? Bond markets have already begun to speculate: debt-laden Portugal? Slow-growing Spain? It's possible the crisis will jump to Britain, Japan, or even to the United States.
The implications of a debt crisis spreading beyond Europe have already rattled stock markets. Here are eight reasons you should be paying attention, too:
1. Because it will impact your neighborhood tool-and-die maker.
The financial crisis has caused the value of the euro to plummet, making it harder for the US and other nations to boost their economies through exports.
As the world's largest trading bloc, the European Union (EU) represents 7 percent of the world's consumers but a fifth of world trade. The dramatic fall in the value of its currency thus has major implications.
If the euro doesn't recover, exports to Europe will fall because they'll be more expensive relative to goods already made in Europe. Similarly, the US, China, and other nations may find it more difficult to export in general, since competition would intensify with European companies, whose goods and services have suddenly become cheaper.
That doesn't automatically mean Europe's slowdown will undercut America's economic rebound. "Problems in Europe could dent our recovery, but not abort it," says Barry Eichengreen, an economist at the University of California, Berkeley.
2. Because it could affect things at the bank window – again.
If one or more of the highly indebted nations defaults, it may well trigger another banking crisis, not just in Europe but worldwide.
France holds nearly a third of Greece's debt, a fifth of Spain's, and a sixth of Portugal's. Germany holds a smaller share of Greece's debt but similar proportions of the debt of the other two. Should one of these nations default, European banks would be hit hard, raising questions about their ability to survive. (See chart, page 29.)
In 2008, concerns about the viability of US banks brought the financial system to the brink of collapse. "You've got the ingredients for a major banking crisis," says Rob Parenteau, who edits the Richebächer Letter, a weekly and monthly financial newsletter, from his base in Berkeley, Calif.