The
fear that began in Athens, raced through Europe and finally
shook the stock market in the United States 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 like the Korean won to weaken. Ten companies 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 United States, 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.
“It’s
not just a European problem, it’s the U.S., Japan and the
U.K. right now,” said Ian Kelson, a bond fund manager in
London with T. Rowe Price. “It’s across the board.”
The
crisis is so perilous for Europe that the leaders of the 16
countries that use the euro worked into the early morning
Saturday on a proposal to create a so–called stabilization
mechanism intended to reassure the markets. On Sunday,
finance ministers from all 27 European Union states are
expected to gather in Brussels to discuss and possibly
approve the proposal.
The
mechanism would probably be a way for the states to
guarantee loans taken out by the European Commission, the
bloc’s executive body, to support ailing economies.
European leaders including the French president, Nicolas
Sarkozy, said Saturday morning that the union should be
ready to activate the mechanism by Monday morning if needed.
In
Spain Saturday, Vice President Joseph R. Biden Jr.
underscored the importance of the issue after meeting with
Prime Minister José Luis Rodríguez Zapatero. “We agreed
on the importance of a resolute European action to
strengthen the European economy and to build confidence in
the markets,” Mr. Biden said. “And I conveyed the
support of the United States of America toward those
efforts.”
Beyond
Europe, the crisis has sent waves of fear through global
stock exchanges.
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 caused 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 on Thursday afternoon, televised images of
rioting in Athens to protest austerity measures only
amplified the anxiety as the stock market 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 H. Gross, managing director of
Pimco, 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 United States 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 U.S. 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 after 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
recovery now gaining 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 favor, 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 percent on new bonds, up from about
8.5 percent 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 United States
economy does still enjoy some favorable tailwinds. Interest
rates have dropped, benefiting homebuyers seeking mortgages
and other borrowers. New data released Friday showed the
economy added 290,000 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. Excluding oil, the 16
countries that make up the euro zone buy about 14 percent 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–stock index come from
abroad, with Europe forming the largest component, according
to Tobias Levkovich, Citigroup’s chief United States
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.
Over
all, United States banks have $3.6 trillion in exposure to
European banks, according to the Bank for International
Settlements. That includes more than a trillion dollars in
loans to France and Germany, and nearly $200 billion to
Spain.
What
is more, American money–market investors are already
feeling nervous about hundreds of billions of dollars in
short–term loans to big European banks and other financial
institutions. “Apparently systemic risk is still alive and
well,” wrote Alex Roever, a J.P. Morgan credit analyst in
a research note published Friday. With so much uncertainty
about Europe and the euro, managers of these ultra–safe
investment vehicles are demanding that European borrowers
pay higher rates.
These
funds provide the lifeblood of the international banking
system. If worries about the safety of European banks
intensify, they 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 signaled
a tipping point that accelerated 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 policy makers were gleefully watching the U.S. 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.”
* James Kanter
contributed from Brussels.