What’s to happen with Greece?
by Ike Trotter
Published: June 10,2012
Greece were to default in the coming months, what kind of financial effect would that have here in America?
Nobody can predict the endgame yet. And, in fact, Greece may even stay in the European Union (EU), although this is looking less and less likely. The big concern increasingly isn’t so much as what happens to Greece as it is what could happen in countries like Spain and Italy -as a result of what happens in Greece. Current economic speculation is that a Greek default would likely be felt on four fronts in America. What becomes more worrisome is how an economic chain reaction would possibly play out in Europe:
>> A Greek default could imperil Spain and Italy: If Greece leaves the EU, then Greek bondholders lose their money — not a good thing.
>> U.S. Banks that are not sensibly hedged could be affected: If Italy and/or Spain were to start spiraling down due to a possible default of Greece, a severe downturn could hit the euro and U.S. lenders could face a huge potential problem. However, if capably hedged against such turmoil, they could ride through this without a lot of damage. The good news here, however, is that U.S. banks, as well as pension funds and insurers, have cut their financial exposure to Greece by more than 40 percent as that country’s sovereign debt crisis has unfolded.
>> Stocks could fall sharply and the dollar could soar: The greenback would become a premier “safe haven” if foreign investors lose faith in the euro. At the same time, a crisis of confidence would imply big losses for equities affecting the pockets of both retail investors and retirement accounts.
>> U.S. companies could be hurt by fewer exports to Europe: Right now, 19 percent of U.S. exports are shipped to EU nations. If a deep EU recession occurs, demand presumably lessens for those exports and that would hurt our factories. If institutional investors run from the euro, it would also make U.S. exports more costly for Europeans. Additionally, the EU is the top trading partner to both the U.S. and China. Deutsche Bank makes particular note of the fact that the EU accounts for 25 percent of global trade.
Ultimately, our recovery could be hindered. Picture higher gas prices, a return of the bear market, jobless figures heading higher again and generally a souring of our overall economic climate. If, however, politicians play their cards right, we may see better outcomes. For example, Greece could elect a new government that decides to abide by the requested austerity cuts linked to bailout money funded through the EU/International Monetary Fund. Thus, Greece could remain in the EU and banks in Spain, Italy, Germany and France could ride through the storm thanks to sufficient capital injections. And while pressure would still be possible with global stocks, it would be at a manageable level.
The bottom line is nobody really knows what will happen. And consider this; Greece only represents 2% of Europe’s GDP. Our U.S. exports and credit exposure to Greece are very minimal at this juncture. With these kinds of facts on the table, I can only say what a lot of people are expressing and that is: I am tired of my investment portfolio being affected by what goes on in Greece.
This Month’s Parting Shot: An article in Workforce50.com provided some interesting statistics that show about half of people eligible today for social security retirement benefits sign up at age 62.
Age 62 represents the earliest age one can receive social security retirement benefits and only pays 75 percent of what normal benefits would start by waiting to age 66. Tragically, the reasoning given by most is to go ahead, get in the system and draw out what you can before the system goes bust.
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