Your 401(k) could sink again. A plummeting euro may make it harder for American companies to sell goods overseas. Credit could be tightened. • These are all potential complications of a European debt crisis that risks spiraling out of control. In today's interconnected global economy, Greece's troubles could, over time, become a headache for all of Europe and, by extension, the rest of the world. • All this because Greece is at a crossroads, unable to form a government and decide whether it will continue on a path of harsh austerity measures or walk away from its debts and give up on the euro. That would leave many European countries holding their debts and shake the foundations of a currency used by 331 million people. • Here's what a Greek debt default and exit from the 17-nation eurozone might mean for people in the United States. — Associated Press
The short-term financial consequences of Greece defaulting may be limited across the Atlantic. U.S. banks already have sharply reduced their exposure to Greece by more than 40 percent to $5.8 billion, according to the government, and Cornell University economist Eswar Prasad said he foresees little immediate blowback for the U.S. financial sector.
But the concern is that market speculation would then fall on the far larger economies of Spain and Italy. Both are deep in the red and heavily dependent on credit markets to stay afloat. And their debts are held by Europe's big banks.
A crisis as bad as Greece's in a bigger nation would have severe global implications. Economists cite the example of Lehman Brothers' collapse in 2008 and the financial turmoil that followed. A repeat scenario could see credit lines dry up as banks short of funds limit risks, making it harder to secure loans for business expansion and mortgages.
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.
For investors who have already faced a half-decade of turbulence, this past weekend's failure in Greece to form a new government led Monday to steep market drops across Europe. Britain's FTSE slipped 2 percent, while Germany's DAX was off 1.9 percent and France's CAC 40 fell 2.3 percent.
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. Market declines across Europe could drag down Asia and the United States, hitting portfolios and retirement funds.
Exports have been a bright spot for the U.S. economy, and Europe has played a big role. More than half of U.S. foreign investment and a fifth of all American exports go to the European Union. A significant slowdown there could mean less revenue for U.S. companies, less expansion at home and lost jobs for American workers.
"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."