Every day newspapers and news programs are reporting on the events in Greece, France, Italy, you name it.
Debt gone bad. Two prime ministers kicked out of office. Countries coming to the rescue. It's the European crisis soap opera that makes "All My Children" look tame by comparison.
Mom sees all the scary headlines every day, and she doesn't understand what it means, nor do most people. All she knows is that she's worried and wants her money safe.
So what does it mean to you and me as consumers? Well, there are actually three ways the European crisis can and will have a huge impact.
Market volatility: If you've watched the news, you know how volatile the stock market has been since the Greek crisis began to unfold, and particularly since August when Standard & Poor's downgraded our nation's credit rating. Up 200 points one day, down 200 the next.
This volatility is measured by the CBOE Volatility Index, a measure of near-term volatility conveyed by the S&P 500 stock index option prices. This index is popularly known as the "fear index." The higher the VIX, the more volatility, hence the greater the market's level of worry.
On Nov. 23, for example, the VIX was about 34; its 52-week low was 14.27, and its 52-week high was 48. As a point of comparison, at the height of the credit crisis three years ago, the VIX soared to a record 89.
Of course, a high VIX could also imply that investors expect prices to rise sharply soon. But in general it means less certainty over where your portfolio will stand, whether it's two years or two months from now.
If you've got money in a college savings plan or are nearing retirement, more pronounced swings in prices of all assets mean you need to think differently about your portfolio. Are you too heavily weighted toward stocks? Should you devote a greater portion to fixed-income alternatives? Perhaps you'd be better off following many affluent Americans and staying in cash or Treasurys.
Sovereign debt and your bank: Major U.S. banks, according to a report by the Congressional Research Service, are exposed to some $641 billion in debt from Greece, Ireland, Italy and other hard-hit European economies. Depending on the outcome of this eurozone crisis, that debt could be worth significantly less than expected. Significant write-offs will affect investors around the world.
Say, for example, your bank held $1 billion in Greek debt. Europe's current proposal is to reduce the burden of debt to that nation by forcing a 50% "haircut" on all holders of that debt. Your bank would then have to write down the value of the debt by $500 million. The effect of that write-down means the bank would have to reserve against the 50% of value it has lost, which would hurt the bank's future earnings and certainly negatively affect its stock price.
