The fear that began in Athens, raced through Europe, and finally shook the stock market in the US is now affecting the broader global economy, from the ability of Asian corporations to raise money to the outlook for money-market funds where American savers park their cash.
What was once a local worry about the debt burden of one of Europe’s smallest economies has quickly gone global. Already, jittery investors have forced Brazil to scale back bond sales as interest rates soared and caused currencies in Asia such as the Korean won to decrease. Ten firms around the world that had planned to issue stock delayed their offerings, the most in a single week since October 2008.
The increased global anxiety threatens to slow the recovery in the US, where job growth has finally picked up after the deepest recession since the Great Depression. It could also inhibit consumer spending as stock portfolios shrink and loans are harder to come by.
Alarm bells: Protesters in Thessaloniki bang pots and pans on Saturday in response to the Greek government’s austerity measures. What was once a local worry about the debt burden of Greece has quickly gone global. AP
"It's not just a European problem, it's the US, Japan, and the UK right now," said Ian Kelson, a bond fund manager in London with T. Rowe Price. "It's across the board."
A decade ago, it took more than a year for the chain reaction that began with the devaluation of the Thai currency to spread beyond Asia to Russia, which defaulted on its debt, and eventually triggered the near-collapse of a giant American hedge fund, Long-Term Capital Management.
This crisis, by contrast, seemed to ricochet from country to country in seconds, as traders simultaneously abandoned everything from Portuguese bonds to American blue chips. On Wall Street Thursday afternoon, televised images of rioting in Athens to protest austerity measures only amplified the anxiety as the stock marked briefly plunged nearly 1,000 points.
"Up until last week there was this confidence that nothing could upset the apple cart as long as the economy and jobs growth was positive," said William Gross, managing director of the Pimco Group, the bond manager. "Now, fear is back in play."
While the immediate causes for worry are Greece's ballooning budget deficit and the risk that other fragile countries like Spain and Portugal might default, the turmoil also exposed deeper fears that government borrowing in bigger nations like Britain, Germany and even the US is unsustainable.
"Greece may just be an early warning signal," said Byron Wien, a prominent Wall Street strategist who is vice chairman of Blackstone Advisory Partners. "The US is a long way from being where Greece is, but the developed world has been living beyond its means and is now being called to account."
If the anxiety spreads, American banks could return to the posture they adopted following the collapse of Lehman Brothers in the fall of 2008, when they cut back sharply on mortgages, auto financing, credit card lending and small business loans. That could stymie job growth, and halt the broader economic recovery that is beginning to gain traction.
Some American companies are facing higher costs to finance their debt, while big exporters are seeing their edge over European rivals shrink as the dollar strengthens. Riskier assets, like stocks, are suddenly out of favour, while cash has streamed into the safest of all investments, gold.
Just as Greece is being forced to pay more to borrow, more risky American companies are being forced to pay up, too. Some issuers of new junk bonds in the consumer sector are likely to have to pay roughly 9% on new bonds, up from about 8.5% before this week's volatility, said Kevin Cassidy, senior credit officer with Moody's.
To be sure, not all of the consequences are negative. Though the situation is perilous for Europe, the US economy does still enjoy some favourable tailwinds. Interest rates have dropped, benefiting homebuyers seeking mortgages and other borrowers. New data released Friday showed the economy added 290,000 new jobs in April, the best monthly showing in four years.
Further, crude oil prices fell last week on fears of a slowdown, which should bring lower prices at the pump within weeks. Meanwhile, the dollar gained ground against the euro, reaching its highest level in 14 months.
While that makes European vacations more affordable for American tourists and could improve the fortunes of European companies, it could hurt profits at their American rivals. A stronger dollar makes American goods less affordable for buyers overseas, a one-two punch for American exporters if Europe falls back into recession as a result of the crisis. Excluding oil, the 16 countries that make up the euro-zone buy about 14% of American exports.
For the largest American companies, which have benefited from the weak dollar in recent years, the pain could be more acute. More than a quarter of the profits of companies in the Standard & Poor's 500 index come from abroad, with Europe forming the largest component, according to Tobias Levkovich, Citigroup's chief US equity strategist.
All this could mean the difference between an economy that grows fast enough to bring down unemployment, and one that is more stagnant.
The direct exposure of American banks to Greece is small, but below the surface, there are signs of other fissures. Even the strongest banks in Germany and France have heavy exposure to more troubled economies on the periphery of the continent, and these big banks in turn are closely intertwined with their American counterparts.
Overall, American banks have $3.6 trillion in exposure to European banks, according to the Bank for International Settlements. That includes more than a trillion in loans to France and Germany, and nearly $200 billion to Spain.
What's more, American money-market investors are already feeling nervous about hundreds of billions in short-term loans to big European banks and other financial institutions.
These funds provide the lifeblood of the international banking system. If worries about the safety of European banks intensify, it could push up their borrowing costs and push down the value of more than $500 billion in short-term debt held by American money-market funds.
Uncertainty about the stability of assets in money market funds marked a tipping point that helped accelerate the downward spiral of the credit crisis in 2008, and ultimately prompted banks to briefly halt lending to one other.
Now, as Europe teeters, the dangers to the American economy—and the broader financial system—are becoming increasingly evident.
"It seems like only yesterday that European policymakers were gleefully watching the US get its economic comeuppance, not appreciating the massive tidal wave coming at them across the Atlantic," said Kenneth Rogoff, a Harvard professor of international finance who also served as the chief economist of the International Monetary Fund. "We should not make the same mistake."
©2010/THE NEW YORK TIMES