Monday, February 20, 2012

Greece’s Challenge and our Exposure to it: A Primer

The United States’ tepid economic recovery is being weighed down by the financial crisis in Europe.  That was the message to the Senate Banking Committee last week at a hearing about what the European debt crisis means for Americans. 
Although the movement of the Dow Jones Industrial Index gets much of the attention as it tips up or down with each bit of news coming from across the pond – the effect on Americans extends beyond the price movements of our domestic equities. 
“The financial stresses in Europe are undoubtedly spilling over to the United States by restraining our exports, weighing on business and consumer confidence, and adding to pressures on U.S. financial markets,” said Steven Kamin, director of the Division of International Finance at the Federal Reserve, in front the committee.

The current center of gravity for this mess is Greece.  It has been mired in a tumultuous two-year (and counting) financial saga over worries that it won’t be able to pay its bills.  These come in the form of sovereign bonds bought by banks and individuals.  The problem is; these purchasers also buy and sell assets in other countries.

Many market watchers are worried that if Greece doesn’t pay up, spurned investors around the globe might reduce their total volume of investments.  This would increase the cost of borrowing for other countries and companies and, some argue, could send the global economy into a tailspin. 

That concern, by itself, is dragging down our economy now.  So when will this all be resolved?