It's hard to list the damages that the euro debt crisis has inflicted on Europe. Not because the effects are subtle -- they're not -- but because the list is so long.

There's austerity in Greece and Portugal that likely means a decade of no growth and falling living standards. There are budget cuts in Spain and Italy that might be enough to get the economies there growing again -- two or three years from now -- but in the meantime mean cuts in wages and pensions. There is the collapse of banks such as Spain's regional cajas and the French/Belgian Dexia -- and the general weakness in European banks that is translating into fewer loans and slower growth. There's the . . . well, you get the idea.

Putting together a list of the damage from the eurozone debt crisis in the United States is harder -- the list is just about as long, but some effects are likely to be hidden or delayed. For example, an immediate effect of the crisis has been a rally in U.S. Treasurys that has driven interest rates down to historical lows.

A good thing, right? In the near term, yes, but not if it delays the day the U.S. starts to deal with its own debt problems and leads to a buildup of debt on the balance sheet of the Federal Reserve.

So, yes, putting together a list of the effects of the European debt crisis on the United States is difficult. But it's important, because looking at the crisis from a U.S. perspective tells us a lot about what we can expect from the U.S. and global markets and economies over the next five to 10 years. And the picture likely includes slow growth and a lot of frustration.

Image: Jim Jubak

Jim Jubak

Making money more expensive

I'd divide the U.S. effects of the eurozone debt crisis into three categories: inside-baseball effects, clearly visible systemic effects and long-term psychological effects.

Inside-baseball effects on the financial markets will make money more expensive -- and economic growth slower.

I don't expect that most of us will notice this type of damage -- it's inside baseball, so the damage is apparent only to those who play deeply inside the game. But it might be the most significant in the middle term, because it is this kind of change that constitutes the most likely mechanism for translating the eurozone debt crisis to the U.S. financial system.

Remember how during the Lehman Brothers bankruptcy and the 2008 global financial crisis the big worry was that contracts in the derivatives market might take down a big financial institution such as JPMorgan Chase (JPM, news) or American International Group (AIG, news)? That fear, indeed, was the key reason for the taxpayer bailout of American International. Nobody knew exactly how much "insurance" the company had extended to other financial institutions, and no one knew what the effect of the failure of American International might be on those other institutions. Banks and other financial companies thousands of miles away from the New York epicenter of the crisis might fail if they were counting on derivatives contracts with American International on the other end to insure them against loss.

The inability of financial regulators and financial markets to figure out who might be holding the bag was the reason that post-Lehman financial reforms invested so much rhetoric into trying to move at least part of the derivatives market from private, institution-to-institution agreements to derivative contracts traded on at least somewhat transparent public markets.

Now the eurozone debt crisis has brought the workings of the derivative markets back onto center stage by calling into question the viability of derivatives to act as insurance against default. At issue is a derivative known as a credit default swap. As the possibility of defaulting on their debt increased for the governments of Greece, Portugal, Ireland, Spain and Italy, investors in the sovereign debt of those countries used credit default swaps as a way to lay off part of that risk.

But you'd have to question the value of any insurance that didn't pay off in a crisis, wouldn't you? And that's exactly what's happening right now in the Greek debt crisis. Although banks and other holders of Greek bonds are being "asked" to accept a 50% reduction on the value of their bonds, the International Swaps and Derivatives Association, the group that makes the call on when credit default swaps are triggered, has so far decided that the 50% loss on Greek government bonds doesn't allow the buyers of this insurance to collect, since the loss is voluntary.

Voluntary? Well, I guess breathing is voluntary since I could decide to stop. I'm sure that this ruling is producing a massive rethinking of the value of derivatives in laying off bond-market risk.

And the upshot of that is likely to lead to bond buyers demanding higher yields to compensate for the risk that they now don't think they can lay off quite so easily or certainly. This means more expensive money -- and that's not good for economic growth in any part of the world.