Greek debt crisis: What does it mean for the US?

Europe could be in for some major belt-tightening to handle the Greek debt crisis, as well as problems in Spain, Portugal, and Ireland. That could slow US economic growth somewhat.

Traders at the New York Stock Exchange saw stocks fall sharply on Tuesday because of the Greek debt crisis. But stocks rallied Wednesday.

On Tuesday as the news spread that Standard & Poor’s had downgraded the government of Greece’s debt to “junk” status, the US stock market stumbled.

Again, on Wednesday, the market’s gulped as Spain’s debt was downgraded. But by the end of the day, the Dow Jones Industrial Average had shrugged off the news, closed up 53.28 points at 11,045.27.

Other than the stock market, what other affect could Europe’s debt crisis have on the US economy?

At the moment, economists believe the fallout from Athens's or even Madrid’s financial problems may have only a modest impact on Main Street.

  • Some US companies that export to Europe may have a harder time competing if the Euro continues to weaken.
  • A stronger US currency might cause some German or French tourists to reconsider a trip to New York or Miami.
  • US banking regulators will be questioning the largest banks to determine how much they could potentially lose if a European nation somehow defaulted on its debt.

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“At the moment it’s something we need to watch but not fear,” says Nariman Behravesh, chief economist at IHS, Inc., an economic research company in Lexington, Mass. “The US is growing almost three times as fast as Europe and the biggest impact is likely to be as Europe grows slowly, our exports to them grow slowly.”

How big a trading partner is Europe?

The slow growth may come about since economists expect European nations, such as Greece, Portugal, Spain, and Ireland to cut spending and perhaps raise taxes.

“Raising taxes and cutting government spending means relatively weak economic growth,” says Jay Bryson, international economist at Wells Fargo Economics in Charlotte, N.C.

The actual impact of this slower growth and fewer tourists walking around the US will be relatively small but measurable, says Mr. Behravesh. “If we’re growing at 3 percent, it could take a couple of tenths off our growth,” he says.

All US exports represent about 11 percent of US gross domestic product (GDP). Of those, 20 percent go to Europe. So, about 2 percent of the nation’s GDP is involved in exports to Europe.

“Any reduction in exports is not a good thing, but it probably won’t drive the US back into a recession,” says Mr. Bryson.

But, at the same time as some European nations have to tighten their belts, the European Union may have to mount a massive bailout of European banks that own much of the downgraded sovereign debt. Behravesh estimates it could cost as much as €600 billion ($800 billion) to rescue the banks.

The US Troubled Asset Relief Program (TARP), which funneled money into the US banks, cost about $700 billion.

Greek bailout not a sure thing

If the Europeans are going to bailout Greece, a lot of the money will have to come from Germany, where public polls indicate opposition to the rescue. “It’s not a sure thing,” says Bryson. “It may not get done.”

And, as other economists point out, throwing money at Greece might be just the first step.

“The problem, of course, is that if Greece is bailed out, then surely Portugal, Ireland, Spain, and perhaps even Italy may not be too far behind,” writes David Rosenberg, chief economist at Gluskin Sheff, a Canadian wealth management company, in a report.

In the case of Spain, he writes, the amount of debt it has to refinance in the coming year is as large as the Greek economy. “So this is not even a case of being too big to fail as much as being too interconnected globally to default,” he concludes.

Exactly how much Spanish debt is on the books of the US banks is not clear. But Behravesh does not think it presents a major risk to the US banking system.

“There is always the risk to individual banks,” he says. “But it does not present a systemic risk to the US.”


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