Greece Defaults, So What?

OK, so let’s say the drum roll finally ends and Greece does default on its government bonds? What’s that to us?

The fact is, we’re all in the same boat — to a greater degree than ever before. When Greece sneezes, everyone else catches cold. It’s something American investors and savers need to keep in mind when they set their long-term strategies.

Greece, of course, is a small country with a pretty small economy. It has borrowed way too much and now may fail to pay back all that it owes. Worry about that washed over the world earlier this week, like a big ripple in a pond.

How can Greece have such a big effect? For on thing, much of the Greek debt is owned by investors outside of the country. So, if Greece fails to make its payments, investors around the world will be hurt. Of course, Greece uses the Euro, linking its fortunes to the rest of Europe’s.

Secondly, Greece is just one of a number of European countries with debt troubles. When people see things falling apart in Greece, they worry the same could happen in Spain, Portugal, Ireland and Italy.

And, finally, jittery investors have a habit of bailing out of all sorts of risky investments when a few go bad. If investors think their Greek bonds are riskier, they may try to make their portfolios safer by getting rid of other types of risky bonds, emerging-market stocks, junk bonds and so on.

Because trading in securities, currencies and commodities is now done electronically on international networks, it’s easy for worries to flash across the globe.

Ordinary investors can see unexpected results. Mutual funds holding foreign stocks, for example, can plunge in value because the stocks themselves fall or because currency exchange rates change. International financial turmoil can affect interest rates or your ability to get a loan, even if your situation doesn’t seem to have changed at all.

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