The potential impact of the current debt crisis in Europe on the U.S. finanancial market - Essay Example

The debt crisis in Europe has wide fetched impacts globally. This is due to the high interdependence amongst countries in the world. There are eminent impacts of this debt crisis on U.S. financial markets, which I am going to explain in this paper.European debts crisis will lead to weakening of the Euro leading to European exports being more expensive. On the other hand, it will result to strengthening of the dollar making U.S. exports to Europe being cheap. Furthermore, in case Spain, Italy or Greece default occurs due to the crisis, a political turmoil could transcend (Kolb, 2011).

Thus major U.S. political allies could lose their positions, weakening consumer confidence in Euro zone. Europe is the major American exports market with 22.5 % of the total U.S. exports. This implies that U.S. exports will be hurt. Moreover, considering since 2008 government spending and exports have been the major U.S. economy drivers. The debt crisis will halt the recovery of the economy, thereby increasing the unemployment rate. In addition, according to FED Chairman Ben, U.S. has little financial exposure to the indebted countries.

Financial markets in Europe and America are highly correlated. This implies that if the current debt worsens further, it will affect France and Germany, where major U.S. banks have significant exposure. This implies that due to the indebtedness of European banks, other banks will be hesitant to give credit on the fear of failure of payment. In case of extension of credit they would demand more security before credit maturity translating to enforced asset sales. This will drive the cost of borrowing high.

This would drive down commodities prices and seize up of financial markets, another 2008 Lehman Brothers Scenario.In the financial market, debt crisis has led to great speculative trading. This is due to the uncertainties and recession fears in the market poised by the Euro zone debt crisis. This has translated to loss of major indices like the Dow Jones, stocks and variances in commodity prices. This is because many of the companies in United States have affiliates in Europe, leaving them exposed to the debt crisis.

This has further translates to low investor confidence, and even shunning of financial markets. In the event of further debt crisis, it may result to the collapse of these markets (Trahan and Krantz, 2011). The market turmoil caused by the Euro zone crisis will negatively affect the U.S. household retirement and saving funds. This will amount to American household losing part of their savings; this is evidenced when U.S. household financial wealth fell by $ 135 million in second quarter of 2011.

Reduced wealth of household implies reduced consumption and increased saving slowing down the economy.Given the current state of joblessness, crisis in housing sector and the problem of debt and Leverage it is imperative that U.S. Investors be cautious and keep abreast with the Debt crisis. On the other hand, European countries should endear to combat any default and press towards alleviating the debt menace. This will amount to prevention of an eminent global financial crisis.ReferencesKolb, R. 2011. Sovereign Debt: From Safety to Default.

New York: John Wiley and Sons.Trahan, F. and Krantz, K.2011. The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground. New York: John Wiley and Sons.