Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jan 31, 2012

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Despite the fact that demand for personal loans has risen in the past few months, the Wall Street Journal reports that U.S. banks have kept credit tight when it comes to issuing those loans out to borrowers. The reason for this apprehensive lending practice points to a rather frightening growth that financial experts across the nation are closely monitoring: the growing European debt crisis.


An Economic Butterfly Effect


Perhaps it’s simply American arrogance, but few questioned the fact that other countries were affected by our financial collapse of 2007. Sure we saw some countries rise far above us, inciting panic amongst many American-born citizens, but the fact that some countries rode our economic wave up in the air, while others were crushed beneath it hardly received a second glance in regards to the fact that we influence others. But with Europe’s looming collapse, some may now be confused and questioning why they are affecting our personal loan market.


As the U.S. trudges through the thick swamp of recovery from our own financial mess, we’re finding our legs are very weak. The slightest bump could buckle our knees and send us plummeting once again. Given how intertwined our economy is with our mother country Britain and its neighbors Italy, France, Spain, and Germany, any recessionary activity across the Atlantic could result in negative movement here in the States.


And international recessionary activity is on the verge of exploding. According to Breakout, a blog sponsored by Bank of America’s Merrill Edge, Europe’s unemployment rate is at an average of 10.4 percent, which signifies that the continent’s financial trouble is reaching a critical mass. Particularly in some of the higher-unemployment countries—such as Spain, who has a crippling 23 percent—the red alarms are sounding as their recessionary bubble’s armor is tearing at the seams.


“The ongoing crisis in the euro zone is beginning to have a more marked impact on domestic credit,” said Paul Ashworth, chief U.S. economist at Capital Economics, according to the Journal.


This was demonstrated by 23 U.S. branches of foreign banks reporting that they are tightening their standards when it comes to lending personal business loans. Additionally, more than half of all U.S. banks who lend to foreign countries have reported tightened lending standards, with 20 percent of them reporting “considerably” tightened standards, according to the Journal.


The banks also stated that U.S. businesses that have a significant client base in European countries would be susceptible to the tighter business loan implementations.


This new picture of Europe influencing our lending practices reiterates the fact that the economies across the world are tied together. Since so many countries export and import goods and services from other nations strewn about the planet, we all feel the vibrations emitted from individual economies. When one economy takes a dive, pressure is thrust upon all other countries in a type of economic butterfly effect.


The U.S. Needs to be Cautious


Perhaps the U.S. needs to be even more cautious though. As the nation’s credit card and personal loan debt rockets upwards, Standard & Poor’s warned that a downgrade may be slowly, but persistently, walking our way.


The primary reason behind this downgrade threat is due to rising health care costs, which S&P believes will reduce our (and other countries’) creditworthiness.


“Governments’ fiscal burdens will increase significantly over the coming decade with the highest deterioration in public finances likely to occur in Europe and other advanced G20 economies,” said S&P in a public statement.

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G20 economies refer to “19 country members and the European Union that represent around 90 percent of the global gross domestic product, 90 percent of global trade, and two thirds of the world’s population.” Among the twenty members making up the G20 is the United States. And after S&P downgraded the U.S. last August, it’s quite clear that our economy is far from invincible, as we once thought.


In fact, when David Owen, Chief European Economist at Jefferies International, was asked about this subject, he responded with a remark none wanted to hear. “Is the U.S. going to be downgraded again?” he repeated the question. “We think so.”


But Owen followed his prediction with the remark, “Our general perception is [the downgrade] won’t have a material impact.”


However, such a statement may be hard to believe given that in the mere shadow of a downgrade, we’re already seeing the impact of tighter personal loan practices.