How the European Debt Crisis Could Affect Your Investments

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It would be nice to think of the European debt crisis as something happening “over there.” But the reality is that the debt crisis has a significant impact on U.S. interests – and investors. The global financial system is now truly global – whatever happens “over there” affects all of us.

What Happened?

How did Europe get into this mess?

Essentially, conventional lenders fear that several European nations, particularly Greece, Italy, Spain, Ireland and Portugal, may not be able to repay their debts. Thus, lenders are only willing to loan these nations additional funds at exceedingly high rates, which they cannot afford.

Financial experts attribute the debt crisis to several factors, including high-risk lending and borrowing, international trade imbalances, real estate bubbles, slow economic growth and poor fiscal policy decisions.

What’s Being Done?

Since the debt crisis began in late 2009, the 17 member nations of the European Union (EU) have taken action, although slowly. It is difficult for EU nations to agree on potential solutions – particularly helping financially troubled nations.

Thus far, Greece has received two significant bailouts from the EU and International Monetary Fund (IMF): approximately $163 billion in 2010 and another $172 billion in 2012.* Ireland and Portugal have also received bailout funds. And in late 2011, the European Central Bank made $639 billion in credit available to troubled nations.*

However, such actions have proven politically problematic. Some people in prosperous EU nations, such as Germany and France, object to using their nation’s funds to assist countries they believe have overspent their means. Meanwhile, citizens of troubled nations, such as Greece, have objected to strict government budget-cutting imposed as a condition of receiving EU aid.

Impact on U.S. Investors

The ripple effect of the debt crisis has already been felt in the United States – with more shock waves likely to come. For instance, when European stock markets fluctuate due to the debt crisis, the U.S. stock market tends to follow suit.

Collectively, the world’s banks are hoping that Greece does not default on its debt, which would have a significant negative global impact. For instance, American companies hold more than $2 trillion in investments in European banks, which have invested heavily in Greece.**

If the debt crisis worsens, American companies that sell goods and services in the EU will find it tougher to find buyers. Affected companies would then take a hit to their revenue and profitability.

Seek Expert Guidance

During uncertain economic times, consider continuing your 403(b) or 457 plan retirement savings strategy as long as it is appropriate to your goals, timeline and risk tolerance. You may want to consult a financial advisor if you have concerns about the appropriateness of your investments. Download “Selecting a 403(b)/457 Advisor & Understanding Plan Fees” to learn more about working with financial advisors.

* Source: The New York Times, Dec. 30, 2011, and Feb. 21, 2012, wwwnytimes.com.

**Source: Forbes, Dec. 8, 2011, www.forbes.com.