Will the Euro Zone Harm My 401(k)?

Euro Zone members are pointing fingers, lecturing on austerity and mugging for cameras by convening riots in the streets and gatherings of politicians.  U.S. consumers just want to hear the “prepare for the worst” commentary, as did Houseman:  

And while the sun and moon endure
Luck’s a chance, but trouble’s sure,
I’d face it as a wise man would,
And train for ill and not for good.

— LXII, A Shropshire Lad,” A. E. Housman

The “training” version is that many investors doubt some EU nations’ ability to pay debts when due.  We’ll skip the history of what led to this and why it hasn’t been fixed already.  We’ll land on how it may affect U.S. pocketbooks and how to protect consumers from splash-back when the bubble bursts.

If the European Central Bank (ECB) persistently buys (or guarantees) bonds of the troubled EU nations, that will reassure that investors and those nations are able to borrow to meet their needs.   Southern EU favors ECB buying; Northern EU doesn’t.

But, if the ECB doesn’t buy/guarantee those bonds, some nations will default on bond redemptions or interest payments, harming the lenders (who are banks, pension funds, mutual funds and other investors).  If any of those investors inadequately diversified their own portfolio, they may suffer default losses that affect their ability to pay obligations such as dividends, bond coupons, and pension payments.  This second-tier damage is called contagion.   

 So what’s a consumer to do?   While we do not give financial advice, there are things are worse pondering.  First, some suggest that you scrutinize the securities where you invested your money.  If you lack deep knowledge and risk tolerance, some may want to avoid direct investments in sovereign debt of any nation or foreign bank considered shaky; likewise for equities.   If you invested in mutual fund or ETF, consider making sure that each fund diversifies and isn’t holding a concentration of shaky nations’ bonds and equities (e.g. <5%).  You can look up the top holdings of mutual funds and ETFs at your broker’s website or at MSN’s Money or at Yahoo Finance.   It’s nearly impossible to check for 2nd and 3rd tier contagion risks.  U.S. bank deposits are covered under FDIC rules and insurance, so those should be safe.  While we offer no advice, these are suggestions to consider.  Be prepared now.  Whatever you do, it’s wise to spend the time to get professional information that will help you make sound financial decisions.  

The chance of a Euro Zone nation’s default is moderate in the case of Greece, but less for the others with excessive debts (Portugal, Ireland, Italy, and Spain).  Since Greece is just 3% of the EU economy, its default would be unpleasant for lenders but not lethal.  Spain’s or Italy’s could create noticeable trouble for Europe.

Alan Daley is a retired businessman living in Florida.  He follows public policy from the consumer’s perspective

FacebooktwitterredditlinkedinFacebooktwitterredditlinkedin