How the Greek crisis could hit your wallet

14:40 14/11/2012 - Πηγή: BankWars

(MoneyWatch) While attention is diverted to the escalating U.S. sex scandal, guess which country is back in the news? Greece is making headlines again and unfortunately, the news is not good. Many investors expected that the indebted country would receive the next $40 billion dollar loan installment this week, but eurozone finance

ministers failed to agree on releasing the funds and will take up the decision next Tuesday.

Greece raised the money it needed to avoid default on an upcoming bond repayment, but investors are getting nervous. I know what you are thinking: I’m just trying to pay my mortgage, do I really need to worry about all of this noise in Greece and Europe? Yes, because the fate of the U.S. economic recovery and your 401(k) may hang in the balance.

It’s not surprising that the five most beleaguered euro zone countries — Italy, Spain Portugal, Greece and Cyprus — are already mired in deep recessions. But the entire 17 country region saw GDP shrink by 0.3 percent in the second quarter and the European Union’s executive commission predicts it will shrink 0.4 percent this year. In other words, the eurozone as a whole is in recession too. The ECB expects the region to grow by only 0.1 percent all of next year.

The eurozone recession is already being felt across the globe, and the world’s big exporters are taking the biggest hits. The Chinese economy, which counts Europe as its largest trading partner, has seen growth slow to 7.4 percent; Japan is on the verge of recession, if not already there; India’s economy is growing at its slowest pace in nearly a decade; and Russia’s Q3 GDP expanded at its slowest rate in more than two years. These problems have hit home: The global pullback has hammered U.S. manufacturing, which slowed to a crawl over the summer and has seen job creation stall as a result.

The other big concern with Europe is that it could gum up the world’s financial system. When weaker countries have to pay more to borrow money, the banks that had previously loaned money to weaker countries lose money on those earlier loans. Rising borrowing costs for weaker euro zone countries, combined with European bank losses, could cause a larger financial meltdown.

While U.S. banks have reduced exposure to the European banking system, a failure of the global financial system would cause immediate negative repercussions. At the precise moment when credit is becoming easier, a European banking crisis would make it harder to get a loan for a house, a car or a small business. There would also likely be a major stock market meltdown that would be reminiscent of the bad old days of 2008-2009.

Maybe European officials will get their acts together and resolve the three-year, slow-motion financial crisis. But given their track record it’s hard to be overly-optimistic. For those who didn’t see the 2008-2009 meltdown until it was too late, the good news is that this version is in plain sight, which means you ca