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The Greatest Risks of the Greek Debt Crisis

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The ongoing debt crisis in Greece continues to spur unrest, move markets and threaten the very fabric that connects the eurozone. Exactly how much effect a Greek default — and the domino effect in lending costs it would have throughout Europe — would have on the U.S. business world remains unclear.

But a good rundown from CNN Money offers a list of the three biggest risks Greek default presents for the United States: (1) U.S. bank exposure to sovereign debt, (2) a pullback in U.S. exports, and (3) U.S. business slow down.

To me, the last one seems the most threatening. Only now is the U.S. economy beginning to make any headway on replacing the jobs lost after the 2008 meltdown — and even this “recovery” remains mild, at best.

Here is how CNN breaks down that risk.

Many products sold by U.S. companies in Europe are made in Europe.

And losses there are already taking a bite out of U.S. multinational firms, from automakers General Motors and Ford Motor, to cereal maker Kellogg and smaller niche companies like watch and accessories maker Fossil, whose stock tumbled 40% in a single day after reporting weak European sales earlier this month.

If the value of the euro versus the dollar continues to drop, U.S. goods are going to become more expensive by comparison to those made by European rivals. And that could cut into U.S. business sales and exports around the globe if countries can get cheaper imports from Europe.

Furthermore, if export-driven economies like China see demand from Europe slow, it increases a risk of a so-called “hard landing” for the Chinese economy.

Given the importance of emerging market growth worldwide, a hard landing in China and other export markets poses a significant threat of creating a global recession, according to a report earlier this year from the World Bank.

And the with U.S. GDP of 2.2% in the most recent quarter, it is doubtful the United States can avoid a recession of its own if there is a true global slowdown.

There’s the “R” word resurfacing. For the United States—not just economies across the pond. In 2012, there is no greater risk facing American companies.

Greece’s Debt Crisis Turns Violent – UPDATE

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greece debt crisis

In response to protests against the country’s massive budget cuts, protesters set fire to a bank in Athens, Greece, which killed three and injured several more. Protesters used paving stones and Molotov cocktails to attack police, who eventually responded with tear gas.

The fire brigade said the bodies were found in the wreckage of a Marfin Bank branch, on the route of the march in the city center.

An estimated 100,000 people took to the streets during nationwide strikes to protest austerity measures imposed as a condition of bailout loans from the International Monetary Fund and other eurozone governments to keep heavily indebted Greece from defaulting on its debts.

Heavily indebted is an understatement. Greece’s financial troubles have been well publicized and the most recent edition of The Economist puts its budget deficit at 13.6% and its debt equal to 115% of GDP, with a prediction that it will reach 149% of GDP by 2014. Striking numbers to say the least.

Graph courtesy of Economist.com

Graph courtesy of Economist.com

Further complicating the country’s debt crisis is the fact that most of its citizens refuse to “endure the cuts in wages and services needed to make the economy competitive.” But those cuts in salaries and pensions and increases in consumer tax are necessary to keep Greece from all-out bankruptcy, which some see as not far off.

And Greece’s financial troubles are effecting already-troubled countries such as Portugal, Spain and Ireland. To get into the intricacies of the financial problems those countries face would take up seven pages of this blog. But the troubles are not isolated to just the euro-zone. It was announced today that Canada’s dollar dropped to a one-month low on concern Greece’s debt crisis is spreading.

“Continued developments in Greece are leading to risk aversion in other markets,” said Matthew Perrier, Toronto-based director of foreign exchange at Bank of Montreal, the nation’s fourth-largest lender. That’s driving the Canadian dollar lower, according to Perrier.

The EU, obviously, is working to calm fears, insisting that what’s happening within Greece is a “unique case.” Even with words meant to calm, Spanish and Portuguese bonds and stocks have fallen this week “on fears that they may likewise have trouble repaying their debt and that the eurozone would have to extend even larger bailouts to them.” As of now, the IMF is granting Greece a $144 billion bailout package. But will it cure the crisis?

Let’s hope The Economist is wrong when they said “Greece looks bust.”

UPDATE: Stocks on Wall Street plunged in response to the Greek debt crisis and the chaos it has spawned. As the New York Times states:

In a matter of minutes, the Dow Jones industrial average tumbled about 565 points, losing almost 1,000 points on the day. The Standard & Poor’s 500-stock index and the Nasdaq followed suit. Computer programs intensified the selloff as market fell through some limits.

It was the biggest intraday loss since the market crash of 1987 for the Dow Jones.

The selloff didn’t last long, however. Almost as quickly as the indices sank, they rebounded — at least somewhat. As of 3 p.m., the Dow was down 461.54, the S&P was down 50.56 and the Nasdaq was down 108.90.