How Europe Economic Woes Could Affect U.S. Markets

Slovenia, Finland and Germany parliaments are scheduled to vote this week on a rescue package to prevent Greece from defaulting. What does this mean for Wall Street and Main Street in America? Guest host Jacki Lyden hears from Wall Street Journal Reporter Sudeep Reddy and Bloomberg Business Week Senior Writer Roben Farzad.

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JACKI LYDEN, Host:

I'm Jacki Lyden, and this is TELL ME MORE, from NPR News. Michel Martin is away.

Coming up, a number of social and economic barriers make it difficult for some communities of color to gain wealth. Today, we talk with a financial planner who's developed strategies specifically for Latinos to create wealth and build prosperous futures for their families and that's ahead in our Money Coach.

But first, let's take a look at the global economy. It's an important week in Europe as many parliaments there are set to vote on measures aimed at propping up the struggling economies of Ireland, Portugal, and Greece. Finance officials from all over the world met over this past weekend at the International Monetary Fund in Washington. Those meetings were intended to devise ways to stem growing anxieties that Europe's debt crisis may lead to a market meltdown.

Here's IMF Managing Director Christine Lagarde speaking on Saturday.

(SOUNDBITE OF SPEECH)

CHRISTINE LAGARDE: I certainly myself was very strongly encouraged by the purpose, the determination, the sense of absolute urgency that was shared amongst the membership.

LYDEN: Here to talk about how economic woes across the pond may impact Wall Street and Main Street in the United States is Sudeep Reddy. He's a reporter who covers economics for the Wall Street Journal. And also with us is Roben Farzad who's a senior writer for Bloomberg Business Week. We're pleased to have you both here with us. Welcome.

ROBEN FARZAD: Thank you Jacki, great to be here.

SUDEEP REDDY: Thank you.

LYDEN: Sudeep, remind us what's the issue at the heart of this crisis which was obviously, you know, at the heart of everything this past weekend?

REDDY: The big issue is this broad concern about the stability of the financial system not only in Europe but in the United States and around the world. And if you look back to the financial crisis we experienced in 2008, that was a small piece, not a - Lehman Brothers was the big bank and of course there was AIG right after that.

Those were pieces of the financial system that if they were properly insulated wouldn't have led to this enormous breakdown in U.S. markets and in the global economy. We saw a contraction in 2009, the economies of the world going into recession for the first time since the Great Depression.

And so, there is the same fear now that a meltdown in Europe this time tied to sovereign debt, the debt of countries that are collectively known as PIIGS in an affectionate way - Portugal, Ireland, Italy, Greece, and Spain. That debt is sitting on bank balance sheets in Europe. And there's a fear that the problems tied to the debt will bring down the banks and bring down the financial system in a way that cascades around the world again.

LYDEN: Now, people were kind of at pains at this IMF meeting to say that that would not happen, as you say. German Chancellor Angela Merkel as well as U.S. Treasury Secretary Timothy Geithner said that, you know, Europe economic woes would not trigger a financial collapse the way Lehman Brothers did. Roben, is comparing a potential debt default of a nation - in this case Greece which everyone's talking about - and the collapse of the financial institution a valid comparison?

FARZAD: There is precedent actually for both going back into the 20th century. We had rolling contagions in the emerging markets in the late 1990s. Greece, I believe 24 centuries ago, saw a municipality default. You've had this happen in Russia. The problem is you have not ever seen this with the experiment of a 17-nation currency and maybe even twice as many countries loosely in that economic union.

It's one thing for a country to become unhinged, it's another thing for an entire subcontinent to go potentially the way of Lehman Brothers. And Sudeep talks about cordoning off Lehman Brothers and AIG. It's infinitely more difficult to cordon off the effects of maybe five nations defaulting.

LYDEN: And that, Roben, is why we are so invested in what's going on in Europe, right?

FARZAD: We're all connected. It's like the old New York telephone jingle. I mean, it's especially so in this case. You can't really be nostalgic for that whole 19th century isolationism, where what happens in Germany and what happens in France is their problem.

Our banking system is inextricably linked to theirs. If you have nominally tens of billions of dollars of Greek debt on one bank's books that could affect that bank, but it affects the entire banking system psychologically because you don't know where the bodies are buried. You don't know which counterparty is good for the money. And that's where the analogue to Lehman Brothers is quite instructive.

LYDEN: If you're just joining us you're listening to TELL ME MORE from NPR News.

We're speaking about how the financial crisis in Europe could impact the U.S. financial markets. And our guests are Roben Farzad of Bloomberg Business Week and Sudeep Reddy of the Wall Street Journal.

Sudeep, Treasury Secretary Geithner met, of course, with his European counterparts for three straight weekends. And the latest was this past weekend here in D.C., as you know. The International Monetary Fund meeting we've been talking about. So, how much does the U.S. depend on Europe for stability in our own markets?

REDDY: The U.S. looks to Europe for two things. One is it's obviously a very important export market. More than a quarter of U.S. exports actually go to Europe. And if you look at multinational corporations from the U.S., they get a very large chunk of their sales from Europe. Those are developed markets.

A lot of the things that the United States produces that are more advanced, whether they're high tech semi conductors, airplanes from Boeing, or some higher end cars. They go to Europe and European's want them. And that's why it's really important for an advanced market to be able to buy our products that we make, especially when we're importing so much from places like China that are making cheaper products.

The other really important link, though, is through financial markets. And the one concern that Secretary Geithner has is that markets drop in Europe and it just spreads around the world. We see that every morning when you're watching Asian and European markets to get a sense of where the U.S. is going to go.

LYDEN: And that's part of a global contagion.

REDDY: Exactly, exactly. There are also some very specific ways. Money market funds in the United States, places where people park their money to really get an instant return, they are heavily invested in European markets and European bank debt.

And so, by being funders to those banks, they are now starting to pull back and worry about the contagion and that's how bank runs begin. When people stop trusting their trading partners and pull back and that's - we're starting to see the early stages of that. And if it were to accelerate in a true panic, true crisis, then it's not only going to affect the money market funds, it's going to affect everybody tied to the money market funds. And that's where you have that enlargening circle of fear spreading around the world.

LYDEN: Roben, how confident do you think the U.S. feels about its trading partners?

FARZAD: It's not very confident. In fact, the default market is pricing in pretty, I mean, inevitable likelihood of Greece defaulting. Now, the problem is, is can that be done in an orderly manner? Can you have the likes of Lagarde and Merkel and some of the more responsible higher-up parties saying that we are going to, hell or high water, protect the tier one economies of Germany, France and, to a lesser extent, Italy and Spain in order for this to not become a global contagion. That the real-time experiment.

If you recall, going back to the Lehman Brothers example and those tense meetings downtown that the New York Fed in September of 2008, people were saying that, listen, we can't just bail every firm out. Bear Stearn's happened already. We know that there is going to be a chain reaction of every bank coming to us and asking for a bailout. It has to stop somewhere. So, let's see if we just let Lehman Brothers go.

LAGARDE: You guys better get your act together. I mean, I'm telling you from a first-person perspective, you don't want to deal with the alternative.

REDDY: And Roben's really right here about the U.S. fears, because Geithner saw during 2008 and 2009 how difficult it was to bring one political system together, particularly during election and election (unintelligible) past under the prior administration's watch. And this time he's looking at the Eurozone 17 governments all fighting together.

When the euro was created as this joint currency 12 years ago, the entire idea was that it would herald in this new era of cooperation and unity among countries that have fought wars and had all sorts of social differences over the years. And to a large extent, it has. It's benefited them tremendously. You can hop a Ryanair flight to go between countries. There is this sense of cohesion in one way, but it's also highlighted the concerns and the differences between them as well.

And the fact that we're sitting here right now worried about whether Finland or Slovenia or Austria are going to pass the bailout plan for Europe and that is hanging over U.S. financial markets and U.S. investors. I doubt most investors who are looking at that can even spot Slovenia on a map and they're dealing with this concern.

That really underscores how much and how tense this situation is and why the U.S. is worried. Because imagine if you had to have Montana, Texas, California and New York all come together and agree on a bailout plan for something that might have started in Michigan or Florida. And it's just very difficult to get those kinds of differences resolved in a quick fashion to get ahead of markets.

LYDEN: Or waking up in Montana thinking about a Greek default. Roben, you're speaking to us in New York. So, all of this uncertainty in the European market, it certainly has had an effect on Wall Street.

FARZAD: Yes, it has, because this is certainly not your garden variety recovery. We're coming off - obviously, you know, it's cliche times 10 by now, the worst economic crisis since the Great Depression. The economy is perilously weak, 9.1 percent unemployment. The long-term unemployment rate is at a record. You have food stamp usage at a record. We need Europe becoming unhinged like we need a bullet in the head.

So, this economy, especially with the dollar being weak, needs to be able to export whatever the heck it can. I mean, people still think that the United States doesn't export anything anymore. Well, in fact, we do with tractor equipment, grains. When the dollar is weak, this is something that's supposed to help us feel our oats again, when other countries that are doing somewhat better than us that have a stronger currency than we do, i.e., the euro, i.e. the yen, can buy from us. And this is something that we badly, badly need to get the unemployment rate to even stabilize in the United States.

LYDEN: Sudeep, a final word?

REDDY: Well, the reason people are so concerned is because the economy is in such a dangerous position. And it's also that there's less trust in policymakers to respond today. There is a lot less ammunition when it comes to both interest rates. Monetary policy has reacted enormously and interest rates are near zero in most advanced economies. And you can see in the U.S. right now how difficult it is to pass any kind of fiscal stimulus to try to boost the economy.

And that's all coming at a time when the world is obviously - and markets are obviously closely interconnected, almost in a frightening way. And so, at times when they're interconnected, you actually do see the benefits of the efficiency, of the ties, how much that helps markets, how much it helps trade. But at times like this when you see how closely they're connected and they could fall apart at the same time, that's something that leads everyone to worry about and worry a lot about.

LYDEN: I try not to think of the words perfect storm a little bit. Sudeep Reddy covers economics for the Wall Street Journal and he joins us here in our Washington, D.C. studios. And Roben Farzad, senior writer for Bloomberg Business Week, joined us from our bureau in New York. Thank you, fellows, for giving us the news and for speaking with us today.

REDDY: Thank you, Jacki.

FARZAD: My pleasure.

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