The Cable

No, the United States Isn’t Completely Insulated From the Greek Default

President Obama insists financial damage from the Greek default will be limited to Europe. It won't be.


A few hours before European finance ministers rejected Greece’s last-minute request for a loan to cover its payment due to the International Monetary Fund, ensuring a Greek default, U.S. President Barack Obama reassured Americans that the primary economic damage from the crisis would remain in Europe.

“It is an issue of substantial concern,” Obama said at a Tuesday afternoon news conference. “It is an issue primarily of concern to Europe.”

The president’s statement is an attempt to calm nervous Americans, who saw the Dow Jones industrial average drop 350 points Monday, the biggest decline of the year, when Greek officials admitted they aren’t going to pay up. And at the very least, the remark acknowledges a crisis that many, including the ever-growing field of Republican 2016 presidential candidates, are keen to misrepresent. But it’s not entirely true.

In 2010, when the crisis began, American banks labored to get rid of Greek assets, which were toxic at the time; a Greek meltdown would have killed the world economy in the middle of the biggest economic downturn since the Great Depression. In 2009, American banks had $15.6 billion in Greek bonds. By 2011, they held just $7.3 billion. But the following year, some banks reversed that trend and jumped back into Greek investments, betting the looming tragedy would have a happier ending.

That was the hope until late last week, when it became clear that Greece and its European creditors were miles apart. Now, Greek government assets are impossible to unload; no one wants them.

According to data from the Bank for International Settlements, U.S. banks now hold around $12 billion in Greek bonds. It’s not a huge sum of money, but if Greece does go belly up, it’s unlikely banks will get this money back.

But perhaps more daunting is what remains unknown. Markets hate uncertainty, and a country leaving the eurozone is something that hasn’t happened before. This introduces what Ian Lesser, director of the German Marshall Fund’s Transatlantic Center in Brussels, calls “systemic financial risks.”

“There are a lot of people who want to say this isn’t the situation we saw three years ago,” Lesser told Foreign Policy Tuesday afternoon. “But when people on Wall Street see a 350-point drop, there are going to be concerns about potential spillovers.”

One potential spillover: U.S. monetary policy, with important implications for the broader economy. Federal Reserve boss Janet Yellen has wanted to increase interest rates for months, arguing that low rates aren’t needed now that the American economic recovery has taken hold. The Greek crisis throws those calculations out of whack.

“I do see the potential for disruptions that could affect the European economic outlook and global financial markets,” she said in mid-June. “To the extent that there are impacts on the euro-area economy or on global financial markets, there would undoubtedly be spillovers to the United States that would affect our outlook as well.”

William Dudley, vice chairman of the Fed’s Federal Open Market Committee, added last Friday that Greece is a “wild card” that the U.S. central bank has to deal with when forming American monetary policy.

According to Lesser, this wild card should have been dealt with prior to the crisis reaching its current peak.

“It’s been a net loss for American and European interests. There’s no way this situation should have evolved to the point that we’ve reached,” he said. “It’s brought us to something with big, unknown risks.”

Photo credit: Saul Loeb/Getty Images

Correction, June 30, 2015: William Dudley is vice chairman of the Federal Reserve’s Federal Open Market Committee. An earlier version of this article mistakenly said he was vice chairman of the Federal Reserve.

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