First things first. Is this a problem? The problem is not so much that Greece has debt that is “spiraling out of control”, so much is that there are political issues preventing Greece from moving forward. Both Greece and Portugal were downgraded by Standard & Poors debt rating service (we all know how well that turned out when they were rating junk CDOs). This has sent both the markets in Europe and Europe’s political leaders into hyperventilation.
The markets have fallen because the spreads (the difference between what the bonds are selling for and what people are buying them for) have widened. Yields (the rate at which the debtor pays back interest) have spiked. The thought is that any restructuring of Greece’s debt will mean that payment is going to be difficult and even if Greece pulls out of this, then they will have a more difficult time borrowing.
The problem, as with most markets, is one of perception. Greece has been in negotiations for quite some time in trying to find a way out of their current situation. Germany, which seems to be Europe’s Mommy and Daddy, are trying to find a way to help Greece without enabling them. For example, Greece was adamant about not raising their retirement age. In February, they changed their tune, raising the retirement age from 61 to 63 and refusing early retirement (once again this is social retirement, so this is state money). Can you imagine any place where you are likelier to live a long and healthy life pulling money from the state? Germany’s current retirement age is 67.
Why should the good citizens of Germany help Greece, when still the retirement age for a Greek citizen is four years earlier than their German counterparts?
But this is just one issue among many. The political posturing is absurd, and will only end when all sides finally realize that they are going to have to do what needs to be done. Say what you want about our political leaders (and I do!), but when we were facing crisis after crisis, both parties pulled together to do something about it (whether you agree with their methods or not). Our economy is recovering, minus minor setbacks.
In Europe, the sense of entitlement has been ingrained too long, which makes it very difficult to move forward.
Now, how does this affect us? Well, we trade with Europe’s banks, who hold investments in Greek (and Portuguese) debt. This can affect us in several ways. But the smart money is on us doing something that would work for us financially. This will affect the Euro, likely causing it to drop and strengthening the dollar. A stronger dollar limits foreign investment, but also allows us to make foreign investment (and smartly).
However, I don’t suspect that Europe will let this get too out of control. Since the creation of the European Union, they have tied their fates together, and none of them want a weaker Euro.