As the Greek debt saga unfolds, you’re likely questioning how it affects you… as an American. The connections are not always obvious, but today an article helps explain how some consequences of Greece’s debt mismanagement could ultimately hit US shores.
From the Washington Post:
“‘The banking system could really act as a shock enhancer in this case,’ said Elisa Parisi-Capone, a senior research analyst at Roubini Global Economics. ‘Given that banks in Europe hold large claims on Greece, if Greece gets in trouble and those claims lose value, the governments of the banks that hold Greek paper are on the hook. This is the link through which contagion propagates.’
“Spreading from one European country to another, these debt troubles could lead to a pullback in bank lending, slowing the continent’s economy further. That in turn might have an indirect effect on the recovery in the United States as Europeans reduce their demand for American products.
“But fiscal crises in Europe could have a more dramatic impact in the United States if they prompt investors to question the ability of the U.S. government to manage its finances. The United States is running large budget deficits, reflecting a sharp decline in tax revenue because of the recession and increased spending to stimulate the anemic economy.
“If bond investors lose faith that the U.S. government will be able to bring the deficits down over time, rates could rise to reflect the risk of default. In turn, that could slow or stop the recovery.”
A debt-related meltdown in Greece could impact the US in two ways. First, diminished demand from Europe for US goods and services hurts the American economy. Second, lessened faith in sovereign debt more broadly could add to the perception that US debt is no longer risk free, resulting in decreased demand for it and contributing to rising interest rates.
You can read more of the details in Washington Post coverage of how the Greek debt crisis could raise problems for the US and other countries.
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