Should we care about Greece's problems? Not too much

Q: Why do financial problems in a relatively small country like Greece cause problems with our markets?
A: Lately, it seems all roads on Wall Street lead to Greece.

Worries about that nation's high level of debt and government spending have created major problems for U.S. stocks. The rally in U.S. stocks that started in March 2009 and helped ease the pain from the 2007-2009 bear market, slipped in April as investors worried about Greece's huge government debt.

There were many reasons the stock market ran into trouble in April, but certainly, Greece was at the top of the list. You ask a good question: Why would a country with a gross domestic product of around $356 billion matter to much larger countries such as the U.S., which has a GDP of $14 trillion?

There are several reasons Greece matters:

1. Fear of contagion. One of the most unnerving prospects to investors is the fear that what started as a financial problem in Greece will expand to Spain and then all of Europe. Certainly, Greece is not a huge trading partner for the U.S., but if all of Europe runs into trouble, that's a problem, because combined, the countries in Europe are the USA's biggest trading parnter, ahead of both Canada and China. And as my colleague David J. Lynch explained in a recent story, European and U.S. banks could be hurt by a Greek default.

2. Lack of a clear resolution. Investors are quickly comforted as long as it appears a fix is in the works. But due to the nature of Europe's economy, fixing the debt crisis is complex. Sixteen European nations share a common currency, but they don't have a unified political system. That means difficult financial decisions must be agreed by all nations. That could be difficult to achieve, and fixes could be too little, too late.

3. Slowing global economic activity. Investors' fear would be that if Europe starts to cut spending to reduce debt, economic growth there could slow. And slower demand in Europe could spread to Asia and to the U.S. This fear is one reason crude oil prices have been soft all year. Less economic activity means less demand for oil.

While all this is true, you should be skeptical. Investors constantly worry about all manner of terrible things that could happen. And most of these fears never pan out. In fact, Riverfront Investment Group believes the problems in Europe most likely won't spell any significant trouble for the U.S. and U.S. stocks.

But you don't want to be naïve either. The issues in Europe are real and will probably take years to resolve. Having these fears in the market add to volatility, and that's a reality investors must deal with.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz

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