The Euro Debt Crisis – which refers to the difficulties experienced by countries in the region trying to make payments on their bonds and other debt obligations – has become a sort of “go to” story for editors of newspaper business sections.
That’s appropriate, of course. The story seems to change almost daily and the potential impact of ongoing developments is huge. Still, the media have not been especially helpful in explaining the causes of the debt problem and how, if at all, the U.S. business person might be impacted. With that in mind, here’s a quick guide to the Euro Debt Crisis and how it might eventually impact business in the U.S.
The Roots of a Crisis
Most economists believe the Euro Debt Crisis can be traced to the U.S. financial crisis of late 2008. The sudden collapse of available business and consumer credit slowed global economic activity and exposed some of the unsustainable spending policies of several European countries. When economic activity slows, so do tax revenues. Greece, Italy, Spain, Portugal, and Ireland – have, to varying degrees, failed to generate enough economic growth to ensure payments to bondholders.
Greece was hit especially hard. The country had over-spent for years, but the healthy economy had hidden the extent of its problems. Incredibly, Greece’s government debt actually exceeded the size of its entire economy. Investors reacted by insisting on higher returns on bonds issued by Greece’s central bank, which raised the country’s debt burden even more. To make matters worse, bond buyers anticipated similar problems with other European economies, and forced bond yields up for those countries, too.
Reactions
In response to the situations in Greece and other troubled economies in the region, the 17-country European Nation took action in 2010 with a bailout of Greece, to the tune of about $160 billion. Greece would also receive a second, slightly smaller bailout and Portugal and Ireland would receive assistance as well. The European Central Bank also became involved, stating that it would take steps necessary to ensure that bond payments from new issues by Italy and Spain would remain at sustainable levels.
Not surprisingly, the situation has elevated political tensions in the region. Taxpayers in fiscally-restrained countries, like Germany, resent that their money is being spent to prop-up economies that were not as frugal. In fact, one of the roadblocks to consistent action in the matter was Germany’s resistance to a region-wide solution. German leaders say if bonds were issued and backed by all 17 European nations, Germany would be responsible for paying an unfair portion of the bill.
But ultimately, Germany did agree to lead most of the region in a pact for stricter budget discipline, and a permanent “rescue fund” has been established. These are encouraging signs, but many analysts remain skeptical.
How does this Impact U.S. Businesses?
The integrated economy means that what happens in Greece, Italy, or nearly any country can impact businesses everywhere.
While day-to-day activities in running your business may not be affected, the Euro crisis remains problematic for the world’s financial markets. It’s likely that problems resulting from the situation will cause credit to remain tighter than it might have been otherwise, making it more difficult to obtain expansion or operating capital through conventional bank sources.
The crisis could also potentially cause complications for the U.S. government budget. The International Monetary Fund (IMF) – an organization made up of most of the world’s nations and charged with promoting financial stability – receives nearly half of its funding from the U.S. If the IMF has to commit considerable resources to a bailout, U.S. taxpayers will pay the lion’s share of the cost. This would likely be politically unpopular at a time when the U.S. debt and deficits continue to expand.
Whatever the economic concerns outside your company, MP Star Financial’s invoice factoring services can help ensure you have the cash flow needed to run and grow your business.
Call MP Star Financial for more information at (800) 833-3765, extension 150.