If the U.S. Takes a Hit, Blame it on Greece

As Americans watch the unfolding Greek crisis, they may think it can’t touch them, but there are many aspects of the meltdown that could reach the U.S. shores. If Greece collapses and exits the Eurozone of the 17 countries using the euro as a currency, the effect could ripple across banks in Europe, the U.S. and rattle Wall Street and world markets. What could happen? Your pension funds and 401 (k) could drop. The fall of the euro could make it more difficult for American companies to sell goods in other countries, especially Europe, jeopardizing U.S. jobs.

In a globalized world, if even a tiny country like Greece sneezes, the U.S. could catch a cold. Not a fatal illness because of Greece’s tiny economy, but the investment of American banks – even through other banks – and their exposure to a Greek default could set off jitters akin to the fall of the Lehman Brothers collapse that helped spark the 2008 Recession.

An Associated Press analysis found Greece’s problems especially worrisome now in the U.S. because of the Presidential campaign, with politics acting as a catalyst as incumbent President Barack Obama gets set to face the presumptive Republican nominee, former Massachusetts Gov. Mitt Romney, a top-flight business executive who is attacking Obama on the U.S. economy and unemployment even though it’s nowhere near the 21.7 percent rate in Greece – some 54 percent for Greek youths under 25, numbers that could scare Americans and cause more anxiety in the U.S. economy.

The stalemated May 6 Greek elections, which failed to give any party a ruling mandate and has led to a number of failed attempts to set up a compromise coalition, has Americans bemused and bewildered at what’s happening in Greece. New elections may need to be held and if Greece doesn’t set up a new government to meet more austerity demands of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) Troika, which is lending the country $325 billion in two bailouts, Greece could default and leave the taxpayers in the 16 other countries in the Eurozone – plus the Troika – holding the bill.

Greece already imposed losses of 74 percent on private investors and is effectively on welfare, locked out of the markets and would have nowhere to turn if it reneges on the Troika deal, leaving the country potentially unable to pay its bills, workers or pensioners, and even set off a run on the banks and cause shortages of food, medicine, fuel and other necessities – a phenomenon not seen in a western country.

The AP analysis found these possible effects in the U.S. if Greece leaves the Eurozone:

BANKS: U.S. banks have greatly reduced their exposure to Greece – more than 40 percent, to $5.8 billion – so there may be limited effect in the sector, but the Greek contagion could spread to banks in other troubled Eurozone countries where American banks are in play: Portugal, Spain and Italy. Scared investors could sell off their assets in Europe’s most troubled economies, and leave the governments struggling to access credit while falling into deeper recession. A crisis as bad as Greece’s in a bigger nation would have severe global implications. “Greece is peanuts as far as the United States is concerned,” said Uri Dadush, former economic policy chief at the World Bank. “But if Greece leads to the contagion of Spain and Italy, the euro could implode. This is big business for the U.S. We’re talking trillions of dollars in direct and indirect exposure to the European banking sector.” He added: “It’s a question I don’t want to find out the answer to, honestly. There is a real danger of global depression.”

MARKETS: Many pension funds, insurance companies and other big investors have dumped or written off investments in Greece, such as government bonds. But there’s no telling how the markets will respond to a default. Each round of bad news from Europe raises uncertainty. No one knows how a Greek exit from the euro would work and the financial swings have added to the stress on Europe’s economy. And every time stocks plunge and the borrowing costs for troubled countries rise, businesses and consumers grow more cautious. This makes them more reluctant to expand companies or buy more property. Individual American investors should be concerned as well, even if most have little direct exposure to southern Europe. Market declines across Europe could drag down Asia and the United States, hitting portfolios and retirement funds. And when people feel poorer, economies shrink.

TRADE: The U.S. does well with exports to Europe, but that could be drastically affected if Greece sets off a domino-like effect, with a slowdown in business for American companies, less expansion domestically and lost jobs. “Right now, the best case scenario in Europe is a recession,” said Chad Moutray, economist at the Washington-based National Association of Manufacturers. “Any of the worst case scenarios threaten our growth strategy.” U.S. manufacturers have added 167,000 jobs over the last five months, but a European economic collapse would hamper growth in two ways. It would weaken Europe’s general demand for goods. And if investors flee Europe for safer bets elsewhere, the value of the euro would sink and make American products more expensive.

Many major U.S. companies not only export but have large operations in Europe. General Motors and Ford both make cars there and have faced slack sales in a competitive market that offers manufacturers little pricing power. Unemployment rates of over 50 percent for people under 25 in Spain and Greece have undermined the market for first-time car buyers in those countries. Unemployment across the Eurozone is already at 10.9 percent, a record since the common currency was introduced in 1999. If that figure worsens still, it would further dampen American sales.

U.S. POLITICS: Any new economic crisis presents a problem for Obama, even if Europe’s problems are largely beyond his control. Higher unemployment, a surge in gas prices or collapsing stock portfolios in the United States would undermine the President’s argument that he has slowly but surely guided the U.S. out of its worst downturn since the Great Depression. His November showdown against Romney is still too close to call and will hinge on the economy. “He’s put us on a road to become more like Greece,” Romney said last month, hammering away at a campaign message that has focused on debt, unemployment and the lackluster state of the American economy and unemployment.