What Greece’s financial woes mean for the U.S.

Greece has consumed the headlines all week as banks closed across the country because of stalled negotiations with its European creditors regarding its debt. The Greek government has promised a popular vote on Sunday to allow the Greek people to decide whether the country should stay in the European Union (EU) or “Grexit.”

The ‘PIGS’ of Europe

The United States has very little direct exposure to Greece and investors have had years to make sure their portfolios weren’t exposed to Greece or the other economically weak and unstable countries of southern Europe. It’s no secret that some European countries are significantly less productive than others. Portugal, Italy, Greece and Spain have been derogatorily called the “PIGS” (an acronym composed of the first letter of their names) of Europe and “club med” countries because they’re thought to work too little, earn too much and receive excessive public benefits.

EU membership brings privileges and penalties

There are economic benefits to being part of the EU, and thus there are rules for maintaining membership. Despite governmental belt-tightening and stricter monetary policies, a program known as “austerity,” Greece’s economy is in shambles and it has not been able to pay off its debt.

With widespread unemployment and deep public discontent, Greece’s government is demanding less stringent terms from its creditors — the European Central Bank, the International Monetary Fund and the European Union. Creditors have resisted and, as a result, Greece faces being kicked out of the EU.

What does this mean to U.S. investors?

In the short term, stock and bond markets are going to be volatile as this situation works its way to a resolution, whether Greece leaves the EU or not. The Greek economy is about the same size as Connecticut and accounts for less than 1% of all U.S. trade, but any trouble in the global economy —whether small tremors or seismic upheaval — is always felt.

If Greece is forced out of the EU by the other 18 member countries, Greece will most likely have to drop the Euro as its currency. If Greece accepts the terms of the newest deal from its creditors, the people of Greece will have to tighten their belts further and take more cuts in their pensions and benefits.

If they don’t make a deal with their creditors, it is likely that Greece will have to start printing its own currency to pay bills. The biggest concern is that an exit from the Euro and debt default by Greece could also pull down Portugal, Italy and Spain and destabilize the entire Eurozone banking system.

European policy makers would need to quickly place a safety net under these other deeply indebted countries to prevent economic disaster from spreading across Europe. Should the disaster spread, expect more volatility for U.S. investors.

Imagine Greece was a household

Greece has been a deeply indebted country for many, many years. It has not taken the necessary steps to correct the situation or even change the tide. To mix metaphors, the chickens have come home to roost and it’s time to pay the piper.

Imagine if Greece were a household instead of a country. While there are good reasons to have debt — for both countries and families — there has to be a reasonable plan for managing that debt over time. Your plan must be flexible because there are so many things that can happen in our lives that can set us back financially. If you have a significant reduction in your income, for instance, then you make a significant reduction in your spending.

“Life happens,” so be ready to adjust, adapt and, most likely, everything will work out fine.

But if you continue spending more than you have coming in by using credit cards, taking out loans, borrowing from you retirement, etc.— then you have a lot in common with Greece and could see your bank shut down on you, too. Let Greece be an example of what not to do. Don’t allow your personal debt to accumulate unchecked until you run out of options.

Ask your financial adviser how he or she can help you and your family avoid financial calamity.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC.