How Greece's Financial Crisis Hurts The U.S. Economy

David Wessel, economics editor of The Wall Street Journal talks to Lynn Neary about why the economic situation in Greece is affecting European banks and the U.S. financial picture.

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LYNN NEARY, HOST:

In this age of the global economy, what happens in Greece doesn't necessarily stay in Greece. To learn more about how Greece's difficulties threatened the U.S. economy, we turn to David Wessel. He's economics editor of the Wall Street Journal and a frequent guest on this program.

Good morning, David. Good to have you with us.

DAVID WESSEL: Thank you.

NEARY: So Greece is a pretty small country, so why are its debt troubles casting such a long shadow?

WESSEL: Well, one reason is that Greece isn't, anymore, an economically independent or isolated country. Like 16 other countries, it surrendered its currency, the drachma; did away with its own central bank; joined up with the euro currency; signed up with the European Central Bank.

Now for several years that allowed it to borrow very cheaply and borrow, it did. Now as we heard, it's being forced to make deep budget cuts and there's a lot of speculation that it won't be able to pay its debt.

If it can't pay its creditors at 100 cents on the dollar, then investors are going to assume, well, will Portugal be next, or Ireland, or maybe the big countries of Italy and Spain. And so that's making it hard for them to borrow at reasonable rates at the same time.

NEARY: And who is it that Greece and these other countries have borrowed from?

WESSEL: That's the key problem. The governments have borrowed heavily from European banks and the banks aren't strong enough to swallow the losses that would occur if they were honest about how much – how little the bonds on their books are worth. So right now there's this big controversy about a French Belgian bank called Dexia which is having trouble to keep itself afloat because markets are so suspicious about the amount of Greek and Italian debts on its books.

And this is a bank which happens to do a lot of business with U.S. cities and towns, and so it's starting to have ripple effects there. I think the fear is that other big banks in Europe could be swept up in this and already economists expect a recession in Europe. If banks get deeper into trouble, the ripple waves could turn into something like an economic tidal wave.

NEARY: Do American banks hold a lot of Greek, or Italian or Spanish debt?

WESSEL: No, and we can be grateful for that, but financial viruses move very quickly around the world these days. I mean, it was just three years ago when Lehman Brothers, a relative small investment bank, collapsed and that set off the worst global financial crises in most of our lifetimes.

On Capitol Hill yesterday, Federal Reserve Chairman Ben Bernanke told members of Congress that what he called a disorderly default by Greece could lead to runs or stresses on European banks, which he said would create a huge amount of financial turmoil that would have, what he said, was a substantial impact - not only on our financial system, but our economy. And that's one of the reasons why the stock market has been so weak lately.

They're worried about the fact that there's a recession in Europe. That means we'll sell less of our good to Europe, but they're also worried about this kind of financial anxiety which leads everybody to hold back, to be reluctant to make risky investments or to hire. I mean, everybody remembers how quickly the economy fell apart in the fall of 2008 and they're kind of afraid that's about to happen again.

NEARY: But when the economy is bad, don't global investors look for safety in U.S. markets and doesn't that benefit us in some way.

WESSEL: Yes, absolutely. In fact, one reason – one of the good things in our economy now, is that long-term interest rates are very, very low, and that's because a whole lot of global investors are pouring their money into U.S. treasury bonds. That's pushing down the rates that our government pays to borrow and pushing down mortgage rates, helped by some of the maneuvers that the Fed's been doing.

You can now get a 30 year mortgage for less than four percent, and in part that's because don't want to hold European paper, so they're investing in the U.S.

NEARY: And does U.S. have any leverage on the European governments to act more quickly to resolve these issues?

WESSEL: Well, not much. Mr. Bernanke called the United States an innocent bystander yesterday. Treasury Secretary Tim Geithner got a lot of attention when he went to Poland, to a meeting of finance ministers recently, to tell them that they're dithering with threatening the whole global economy and to offer them some clues about how to fix it borrowed from our own rescue. But basically, the eurozone is 17 countries, they don't agree on much, they're having a really hard time sorting this out, and the crisis is getting worse because markets suspect they won't be able to do it soon.

NEARY: David Wessel of the Wall Street Journal, thanks very much.

WESSEL: You're welcome.

(SOUNDBITE OF MUSIC)

NEARY: And you're listening to MORNING EDITION from NPR News.

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