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How does the European debt crisis affect the American economy?

Jan 12, 2012 by Marilyn from Greenwich, CT in  |  Flag
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Thanks for the question Marilyn. Of course the future of markets are impacted by many factors. Oftentimes, one factor may then impact another. The mortgage meltdown not only affected bonds which also impacted financials, but that then trickled into the housing market, that trickled into the building materials and appliance industries, which then trickled into just about every sector of our economy. The immediate impact of a default of the sovereign debt would be pain to the bondholders. Some of that would be mutual funds that hold foreign debt, but also it would hurt many financial institutions that place some of their holdings in sovereign debt. That would be larger banks of course that place some of their holdings there, but also insurance companies that place a good deal of their holdings in various bond components. It would seem consistent to think that banks that suffer losses would then be more guarded and/or have required reserves come into jeopardy again causing a banking crisis. The Euro would shrink in value, causing holders of Euros to have less purchasing power, but with the dollar getting stronger against the Euro, it would be a good time to plan your European vacation (as long as you can avoid the austerity riots!).

Going back to the mortgage meltdown in the US, the real answer to your question is determining where, and how deep do the tentacles reach. If inflation runs amuck in the Euro countries, that will hurt our exports there and impact US corporate profits to a small degree. The real question is can the US companies sustain the small amount of hurt on the heels of an attempted recovery. All things being said, at our firm we have routed our more conservative clients into a heavily defensive position poised first to protect capital. September and October 2008 came and went so quickly, we are looking to avoid a similar (but suspect lessened) meltdown. Hope this commentary is helpful.

Comment   |  Flag   |  Jan 16, 2012 from East Dundee, IL

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Marilyn, that is a great question that is not easy to answer. On one level, their debt crisis will likely result in an austerity that will affect imports from US companies that sell goods and services to European markets. In addition, that general austerity contributes to global deflationary pressures. On the bigger picture, instability and uncertainty anywhere in the world is a bad thing for equity markets in general. I hope this has helped.

Comment   |  Flag   |  Jan 13, 2012 from Port Chester, NY

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