Answer to Question #29511 in Finance for Crystal

Question

•Evaluate the relationship between the European Euro crisis in 2012 and the American economy. Assess how this affects American businesses and decisions made by mangers related to sustainable profitability. Provide examples with your response.

Answer 1

There are several channels of exposure between U.S. institutions and Europe.Obviously, there's direct exposure. But that's relatively modest from the point
of view of branches of U.S. banks holding securities against Europe. But
obviously U.S. banks are global and have operations in many of the European
countries.

Were there to be an unraveling or severe dislocation [in the eurozone], then the contagion would not be directly on the balance sheet [of U.S. banks], but
on just the overall re-pricing of risk.

Were there to be an unraveling or severe dislocation, then the contagion would not be directly on the balance sheet [of U.S. banks], but on just the
overall re-pricing of risk. The cost of the capital of the banks would go up,
spreads would go up--and as credit spreads rise, the assets on banks balance
sheets would lose value, even if not directly tied to Europe. So clearly, a
disorderly Greek exit or just unraveling of the commitment to the Eurozone
would have serious repercussions in the U.S.--over and above any direct
exposure.

The channels are indirect, so that when concerns about the crisis are elevated, we do see several impacts. One--we tend to see U.S. interest rates
fall, at least on government bonds, so that's a good thing. On the other hand,
credit spreads and the cost of borrowing tends to rise because of general
riskiness. Also, stock prices fall, and our ability to export is hurt if the
rest of the world is not doing well. On balance, it is a negative for the
economy when Europe is under duress.