How Europe’s debt crisis hits your wallet

By Jennifer Openshaw, Marketwatch

Everyday newspapers and news programs are headlining about the events in Greece, France, Italy, you name it.

Debt gone bad. Two prime ministers kicked out of office. Countries coming to the rescue. It’s the European crisis soap opera that makes “All My Children” look tame by comparison.

Mom sees all the scary headlines every day, and doesn’t understand what it means, nor do most people. All she knows is that she’s worried and wants her money safe.

So what does it mean to you and me as consumers? Well, there are actually three ways the European crisis can and will have a huge impact.

Volatility: If you’ve watched the news, you’ve seen how volatile the stock market has been since the Greek crisis began to unfold last year, and particularly since this past August when S&P downgraded our nation’s credit rating. Up 200 points one day, down 200 the next.

If you’ve got money in a college savings plan or are nearing retirement, more pronounced swings in prices of all assets means you need to think differently about your portfolio. Are you too heavily weighted toward stocks? Should you devote a greater portion to fixed-income alternatives? Perhaps you’d be better off following many affluent Americans and staying in cash or Treasuries.

Sovereign debt and your bank: Major U.S. banks, according to a report by the Congressional Research Services, are exposed to some $641 billion in debt from Greece, Ireland, Italy and other hard-hit European economies. Depending on the outcome of this euro zone crisis, that debt could be worth significantly less than expected. Significant write-offs will impact investors around the world.

Say, for example, your bank held $1 billion in Greek debt. Europe’s current proposal is to reduce the burden of debt to that nation by forcing a 50% “haircut” on all holders of that debt. Your bank would then have to write down the value of the debt by $500 million. The effect of that write-down means the bank would have to reserve against the 50% of value it has lost, which would hurt the bank’s future earnings, and certainly negatively impact its stock price.

Remember what happened during our own financial crisis? Banks had to write down their holdings in billions of dollars of subprime home mortgages, blowing huge holes in their balance sheets. That put a real damper on lending activity to consumers and small businesses. We could see a repeat of that scenario if the European debt crisis spreads beyond Greece (Italy could be the next casualty), further impairing our recovery and hurting job creation.

Think of it this way: Let’s say one of the stocks you own a big position in loses half its value. Your personal net worth (at least on paper) takes a real hit. You may now think twice before co-signing your cousin’s truck loan, regardless of what a great guy he is and how much you want to help him.

Sale of U.S products and jobs: Whether it’s cars, computers or corn, we manufacture and export products to Europe. According to the U.S. Census, six of our top export partners, including Britain, France and Germany, account for nearly 16% of total U.S. exports. The European Commission for Trade says “total U.S. investment in the European Union (EU) is three times higher than in all of Asia and EU investment in the U.S. is around eight times the amount of EU investment in India and China together.”

What does this mean? If, thanks to the spreading sovereign debt problem, our European partners face a growing economic slowdown, we’re likely to see fewer U.S. products purchased overseas. That will certainly hurt our jobs outlook next year.

Take General Motors Co., which 17 percent of sales from Europe. Chief Executive Dan Akerson is now looking for ways to reduce its exposure to the euro zone, saying that slower sales “is a manifestation of Europe’s economic morass.”

Teen retailer Abercrombie & Fitch Co. is also feeling the squeeze on sales; maybe the chances of your own teen getting hired there would dwindle.

Even McDonald’s Corp.’s Europe division, which is the Golden Arches’ second largest region (by revenue), employing more than 400,000 people in Europe with more than 700 restaurants, could see fewer Big Macs gobbled down despite the attraction of cheap eats in a recession.

Don’t forget that many Americans are employed here and abroad by European companies. BNP Paribas, France’s largest bank, has thousands of US workers and just announced cuts of 10,000 employees worldwide.

There’s no question that the steady drumbeat of negative economic news coming from Europe has had an unnerving effect on business and political leaders around the world. The failure of those leaders to provide effective solutions, despite years of warning signs, has severely limited the options nations in that region now have.