How the Eurozone Crisis Will Affect Us Here in the U.S.

 

Many people have tuned out the European debt crisis and believe simply that another emergency meeting will be held in which nothing will be decided, allowing the eurozone to simply continue surviving as it has.

The problem with this line of thinking is that the unemployment rate and the economic recession continue to worsen in the eurozone, therefore prompting leaders to resolve the European debt crisis and get their citizens back to work instead of having them protest on the streets.

It is critical that something done very soon or there will be ramifications here in the U.S. as well. The eurozone could experience a banking crisis that will be worse than the Lehman crisis in 2008 and will lead to the European debt crisis reaching heights no one could ever imagine.

The best way to describe the situation is to use Portugal as an example. The debt and unemployment situation in Portugal is such that the country will most assuredly require another bailout from the eurozone.

Yet throughout this European debt crisis in 2012, there has been very little mention of Portugal. If its situation is just as bad as Spain’s, if not worse, then why hasn’t Portugal been in the headlines as the European debt crisis deepens?

The answer is that although Portugal will most likely require another bailout from the eurozone, the country does not need to roll its debt over until the first quarter of 2013. This is a very important concept to grasp, dear reader. It isn’t only the size of the debt that a nation carries that is critically important; when that debt matures and so needs to be rolled over counts as well.

The reason this is so important is that eurozone investors and investors holding bonds of countries like Greece, Spain and Italy have debt maturing this July, for example. Will investors paid the money from the eurozone, during the European debt crisis, be willing to reinvest their money in Spanish bonds? We all know the answer is a resounding “no.” These investors will take their money and pull out of the eurozone and be thankful their investments did not go to zero amidst the European debt crisis.

The estimates vary, but the 17 nations that make up the eurozone need to rollover roughly 800 billion euros in 2012. Obviously, Germany along with the Netherlands, Austria and other northern countries of Europe will be able to roll over their debt comfortably. The problem is that eurozone countries like Greece, Spain and Italy are seeing money flee out of their countries and so their interest rates rise on their debt as a consequence.

As investors flee the eurozone, and especially the more troubled countries, the Greek banks, Spanish banks and Italian banks still need money in order to meet their daily obligations and continue to keep their economies functioning. This is why the European debt crisis is escalating. This is why the prime minister of Spain is saying the country cannot function for much longer without a bailout.

If any of these eurozone banks go bankrupt, it will cause unforeseen effects even here in the U.S. The financial system is connected globally and U.S. banks have significant ties with the eurozone and the European debt crisis.

To what extent? Well, we are all going to find out if money is not provided to the banks in southern part of the eurozone. It is time to take the European debt crisis seriously.

Where the Market Stands; Where it’s Headed:

On Friday, rumors surfaced that the European Economic Union was taking measures to support the Italian and Spanish banks…and presto…the Dow Jones Industrial Average surged some 250 points.

This is very important, dear reader, as it signals that the stock market is reaching a top. When you have stock market that only trades higher on rumors of money printing, and moves lower on poor economic news and poor corporate earning, the market is treading water.

Who will benefit the most as world central banks print money to get us out of the next economic down leg? Long-term, it won’t be the stock market; it will be gold bullion (which, incidentally, was up $50.00 an ounce Friday on the news the European Union would support the Italian and Spanish bond markets—i.e. news of money printing).

What He Said:

“For the economy the message from retail stocks is quite clear: consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in Profit Confidential, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008