PIIGS Get Slaughtered, Impacting US Markets

Stocks sank this morning after European debt problems sent another wave of pessimism through the market. European markets fell in response to uneasiness over whether a $145 billion bailout package for Greece will be approved by the 15 European Union members that would shoulder much of the cost. One concern among traders is that the size of the Greek bailout package could make it harder for the EU to rescue other countries that might need help.


How does this affect the U.S. Market? When the euro falls against the dollar, traders avoid the currency, which is used by 16 EU members including Greece. The euro hit its lowest level in a year. The U.S. investors are concerned that a stronger dollar would cut into profits for U.S. companies that heavily rely on foreign operations. When the dollar is up over the euro, overseas profits translate into less money.

The Greek debt problem is making a big impact on the markets this week, and the fallout is still far from over. There is a concern that the Greek contagion is beginning to spread to the other PIIGS. Last week, Standard & Poore’s (S & P) announced a cut to Portugal’s sovereign credit rating from A+ to A and cut Greece’s bond rating to BBB+. Following that, Spain saw its credit rating slashed, too. The Greek debt crisis has been described an economic virus, spreading among the PIIGS and triggering the euro's slide.

Day to day it's hard to keep track of all the commotion related to Europe's economic problems. Greek labor unions balk at a bailout; German politicians are stalling on their role in approving a bailout based on domestic political pressures; and some market economists argue in favor of allowing Greece to default rather than seeing through an expensive bailout package.

All the fluctuation in the markets related to the euro and the Greek debt crisis may be far from over, too, even though the EU is talking in terms of the "finishing touches" on a bailout package.   On Thursday, Barclay's Capital wrote "We believe the move toward a Greek rescue package will remain a slow grind and a weight on the euro." One of the reasons given to expect more ups and downs was the political situation in Germany. Of course, the looming debt crises in Spain and Portugal have not helped, either. It's still an open question this week whether after months of back and forth over the path forward for Greece, the EU will be able to pull together and bring Greece back from the unplanned-for crisis in 2010.

Some are asking the critical question. Will the euro collapse in 2010?  No one can say what exactly will happen going forward. Government structures stay in place for a long time, the US is still on its feet, for the time being. Other countries have defaulted on their loans and are still here. In the highly developed West, that is almost a given. So while the EU may not dissolve, when all this is said and done, its governmental structures will have definitely been altered.