Greece’s debt: How could a default hurt the U.S.? - Trade Only Today

Greece’s debt: How could a default hurt the U.S.?

Greece was the word Monday, as it has been for several months during the latest chapter in the country’s long-running debt crisis.
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Greece was the word Monday, as it has been for several months during the latest chapter in the country’s long-running debt crisis.

New proposals from the beleaguered nation raised hopes among European policy-makers that a deal is still possible, but what if they can’t agree and Greece defaults and is pushed out of the euro zone? How might that affect the U.S. economy?

The answer is not especially clear. Mark Huffman, a reporter for Consumer Affairs, said late last week that the effects of a default certainly would reach the United States if U.S. banks hold the debt of European banks that hold Greek bonds.

The world knows Greece owes billions, but Huffman said the identities of the debt holders aren’t totally clear.

“When it comes to markets and economies, uncertainty is dangerous,” he said.

U.S. Treasury Secretary Jack Lew, testifying before the House Financial Services Committee last week, warned that Greece’s debt crisis could destabilize the American financial system.

"In today's globally integrated financial markets, foreign shocks have the potential to disrupt financial stability in the United States," Lew said.

Huffman said the last time Washington heard a warning of that kind was in 2008, when the subprime mortgage collapse threatened the banking system.

“Our big banks are tethered at the hip to their banks,” Mark Zandi, chief economist at Moody’s Analytics, said in an article at education.howthemarketworks.com that discusses several ways the debt crisis could affect this country. “They’re all at risk. They’re all exposed.”

Europe is the largest trading partner of the United States, and the authors of the howthemarketworks.com story said U.S. businesses also worry that a financial panic in Europe might cause a recession in the euro zone, curbing purchases of U.S. products by European consumers.

MarketWatch, however, said Sunday that uncertainties about Greece could actually boost U.S. markets — the bond market, in particular —as investors look for safe havens.

“The search for perceived safety may attract more global savings to U.S. Treasury securities and persuade the Federal Reserve to postpone its rate hikes until 2016,” Paul Christopher, head of international strategy at Wells Fargo Investment Institute, told MarketWatch.

On Monday, euro zone finance ministers expressed cautious optimism that Greece’s new reform proposals could be the basis of an agreement this week that would stave off a default. The proposals included higher taxes and steps to curtail early retirement.

Reuters reported that Greece must repay the International Monetary Fund 1.6 billion euros by June 30 or be declared in default, potentially triggering a bank run and capital controls.

"We will work very hard in the next few days — the [lending] institutions with the Greek government — to get that deal this week," Jeroen Dijsselbloem, chairman of the Eurogroup of 19 euro zone finance ministers, told Reuters.

“I’m of the opinion that we’ll achieve an agreement with Greece this week,” European Commission President Jean-Claude Juncker told reporters in Brussels after meeting with Greek Prime Minister Alexis Tsipras. “This won’t be easy, we will work at this — just like we did over the last two days and nights — but my goal still is that by the end of the week we’ll find an agreement.”

Meanwhile, signs that the U.S. economy is continuing to improve in the second quarter increased on Monday as the National Association of Realtors reported that home resales rose 5.1 percent in May, to a seasonally adjusted rate of 5.35 million. April sales were revised upward, to 5.09 million, from an initially reported 5.04 million.

“We’re moving back toward a more normal housing market,” Stephen Stanley, chief economist at Amherst Pierpont Securities, told the Wall Street Journal.

Several other reports for May are due this week, and economists expect most of them to show improvement from the previous month.

Today will bring reports on new-home sales and durable goods orders. On Wednesday, a report on revised first-quarter GDP is expected to show a decline of 0.2 percent, up from the 0.7 percent drop that the Commerce Department initially reported.

Reports on consumer spending and personal income will be issued on Thursday.

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