What Greece And China Troubles Mean For Your Savings

By Gail MarksJarvis
Chicago Tribune.

China and Greece depressed American savings in 401(k)s and college and retirement accounts this week and then healed much of the loss by the weekend.

Is it over?

Perhaps for awhile, but that doesn’t mean over for good.

Trepidation over Greece eased Friday when it looked like it would get an emergency European bailout this weekend. China calmed after its government wrapped a tourniquet around a hemorrhaging stock market that’s been bleeding away the savings of regular Chinese people caught up in a recent stock market mania.

Since Greece has the potential to infect all of Europe, and since China is the world’s second largest economy, there is little distance between the overseas economies and U.S. turf. So if the week’s episodes flare again, the U.S. stock market and, consequently, American retirement accounts will surely feel it.

Greece is in a worse depression than the U.S. Great Depression. It cannot repay more than $300 billion in debts, 25 percent of workers are unemployed and 50 percent of its potential young workforce is without jobs. The economy has shrunk 25 percent in the last few years.

Many wealthy Greeks have moved their wealth out of the country. Banks would be bankrupt if it weren’t for the aid they’ve been getting, and that aid is about to cease unless Greece agrees to conditions Europeans want to impose.

Greece claims Europe has imposed such strict restrictions that it cannot grow enough to ever repay its debts.

A sizable majority of the country recently voted to reject Europe’s conditions for a new bailout, but without aid banks will collapse and the nation won’t be able to pay for everything from food, to medicine and oil.

Greece is a country of 11 million people, and on that basis, its fate isn’t critical to the global economy or the United States.

But if Greece can’t get the aid it needs, the concern is it will leave the eurozone and potentially pave the way for heavily indebted countries such as Portugal, Spain and Italy to also leave without paying their debts. This could destroy lenders and could cause a cascade of bank failures because in a global system, banks are intertwined. Analysts say Europe has implemented safeguards against such a dangerous financial spiral.

But they also use the word, “contagion,” a situation in which sick banks would make other banks sick worldwide. If that occurred and Europe sank into a recession, the U.S. economy would be impacted.

U.S. companies get about 11 percent of their sales in Europe, and troubled economies buy less. Further, the euro would sink in value and the dollar would be stronger. That would make U.S. products more expensive in Europe and potential buyers would purchase cheaper products elsewhere.

If Greece doesn’t get aid from Europe, it might turn to Russia, and allow Russia a key foothold in Europe.
These perspectives will all be at play this weekend as finance leaders from the Eurozone meet to decide if they will grant Greece aid.

China’s stock market plunged more than 30 percent from its high on June 12, a tremendous drop in such a short time, and could portend an economy about to crack.

While analysts see evidence of slowing in the form of falling commodity prices, some blame the stock market plunge on crazy investing behavior.

With the banking system under pressure, the government encouraged working-class people to invest in Chinese stocks, and for the first time allowed investors outside China to buy stocks.

The result: Stocks soared about 130 percent, then collapsed, wiping out life savings for many Chinese.

“These types of developments leave painful memories,” said Steven Roach, senior fellow at Yale University’s Jackson Institute for Global Affairs. The risk is that individuals who have lost savings will not consume as needed and will avoid investing in the future, he said.

Still, he expects China’s economy to grow at about six to 6.5 percent, which is slower than the recent 10 percent but not a recession.

Worried investors sold stocks last week rather than waiting to finding out the impact of China and Europe on the United States. Caterpillar, which depends on China for machinery sales, fell 2.64 percent last week.

If China goes into decline, “it will hurt U.S. corporate profits because there will be an excess of stuff around the world, too many hogs, steel, shoes … and that would lead to price declines,” said Citigroup analyst Tobias Levkovich.

But the U.S. remains primarily dependent on U.S. consumers, only about 33 percent of the $11 trillion sales by large U.S. companies are foreign.

Mutual funds in 401(k)s and other accounts, however, may show signs of worry in the weeks ahead as investors wonder about the fate of Europe and China. Last week the average U.S. stock fund tracked by Morningstar lost 1.3 percent, while foreign funds on average lost 2.8 percent and those focused on emerging markets, including China and other countries that depend on China purchases, lost 4.25 percent.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.”

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