Five ways the European debt crisis could affect the U.S.

ByABC News
October 27, 2011, 6:54 PM

WASHINGTON -- The financial crisis that began in the United States in 2008 swept across the Atlantic to Europe. Now U.S. political and financial leaders are hoping a tentative deal to relieve Europe's debt crisis will prevent a similar stampede in reverse.

They had reason to smile Thursday. Meeting for the 14th time in 21 months, Europe's leaders announced a 50% reduction in Greece's loan repayments to private lenders, a $1.4 trillion rescue fund to keep credit flowing to other troubled nations and a bank recapitalization program designed to boost reserves by the middle of next year.

The deal had an immediate effect on financial markets, with the Dow Jones industrial average closing almost 3% highter Thursday.

But behind the rhetoric, many details remain to be worked out. Banks must agree to the latest bailout for Greece, which still would leave its gross debt at 120% of its economy by 2020, down from 160%. The rescue fund firewall relies on leveraging the European Financial Stability Facility rather than new government contributions. And European banks still could remain short of capital for the next eight months, threatening the flow of credit to consumers.

Despite the initial enthusiasm surrounding the deal, potential for future problems remains. The effects of Europe's ills have damaged U.S. interests, from multinational companies to major exporters. Individual investors have plenty of reason for concern, as the enthusiasm from earlier agreements has given way to pessimism and stock market dives. And a year from now, Europe's financial troubles could affect the U.S. presidential election.

"The economic health of Europe is vital to the prosperity of the United States," says Daniel Price, managing director at Rock Creek Global Advisors, who was President George W. Bush's top deputy for international economics.

Struggling with its own domestic economic woes even as the government reported 2.5% growth in the third quarter, the Obama administration has heaped pressure on European political leaders to solve their crisis before it gets worse. At first confined to Greece, then Portugal and Ireland, the sovereign debt crisis now threatens Italy, Spain and the European banks that hold much of those countries' IOUs.

President Obama has kept in steady contact with German Chancellor Angela Merkel and French President Nicolas Sarkozy, the two linchpins of the 17-member eurozone, in the days leading up to next week's G-20 summit. On Thursday, he called the latest agreement "an important first step."

"It will definitely have an impact on us here in the United States," Obama said. "If Europe is weak, if Europe is not growing, as our largest trading partner, that's going to have an impact on our businesses and our ability to create jobs here in the United States."

One role the United States can play is to countenance the use of the International Monetary Fund's $380 billion in lending authority. It also can seek contributions to the rescue fund from China and other developing but thriving nations.

"I can assure you that the IMF will continue to play its part in supporting the efforts made today to address the challenges facing the euro area and to restore growth to its full potential," IMF Managing Director Christine Lagarde said.