The European debt crisis has now claimed France, which just lost its coveted AAA rating amid a Standard & Poor's downgrade, and eventually U.S. financial systems could be due for a fresh bruising, says Robert Wiedemer, financial commentator and best-selling author of "Aftershock."
Like Greece and other European countries, the United States is carrying too much debt and won't be able to handle it much longer without facing backlash from ratings agencies or markets.
"I think what most people are ignoring is that the U.S. has a lot of these same problems. I think they think it's just a Europe problem just as France and Germany thought it was a Greek problem or an Ireland problem," Wiedemer told Newsmax.TV in an exclusive interview.
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The European debt crisis began in Greece, where weak economic activity is making it harder to service its massive debts.
The country has avoided throwing up its hands and defaulting by accepting aid and tough lending terms from other European countries and also under the auspices of the European Central Bank (ECB) and the International Monetary Fund.
But the country remains unable to break free, and the crisis later spread to Italy and Spain and now France, which confirmed earlier Friday that it had been stripped of its AAA rating by S&P.
Standard & Poor's downgraded the credit ratings of eight other eurozone countries, also stripping Austria of its coveted triple-A status but not EU paymaster Germany, in a Black Friday the 13th for the troubled single currency area.
"I think the lesson to be learned is if it can spread to France, it can spread to the U.S.,” says Wiedemer, managing director of Absolute Investment Management.
“Ultimately we have debts that are huge as well. We have no way to pay them off."
To spur economic growth, the United States has been able to resort to quantitative easing, such as asset purchases from banks with freshly minted money.
However, the ECB has refused to carry out such a program — at least in the same size and scope as the U.S. has done — on the grounds that it could push up inflation rates.
Sooner or later, it may have to.
"I think the easy way out is for the ECB to print money. They can yell and scream all they want but it's the easy way out. I think just being willing to buy more bonds and give more liquidity to banks will help out," says Wiedemer, who recently released an updated edition of his best-selling book, "Aftershock."
The United States, meanwhile, may be asked to play a bigger role in solving the European debt crisis.
With France downgraded, it makes it more expensive for Paris to participate in bailout facilities for the more-troubled European countries.
While the U.S. financial system isn’t too directly exposed to the countries in the epicenter of the crisis, U.S. banks do carry counterparty risk due to their dealings with banks in Europe who are exposed to Greece and Italy.
"France is not going to be able to be as big a part of any future bailouts as it would have been with a higher credit rating,” he said.
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“It's going to have to lean more on Germany, and if the European bailouts are going to lean more on Germany there's a real good chance they are going to lean more on the U.S.,” says Wiedemer, a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media.
“So I would say the U.S. would have to play a larger role in any sort of European bailout," Wiedemer says.
"If France is having trouble that means all of Europe is having trouble."
Standard & Poor's stripped the U.S of its AAA rating in August 2011 due to its inability to narrow deficits in wake of the debt-ceiling debacle, which wasn’t related to the European debt crisis.
Ironically, Treasurys quickly assumed a safe-haven status at the time of the U.S. downgrade, as European debt woes escalated and roiled markets.
Treasurys will continue to perform well in 2012, but they can only climb so high.
“I think they'll do well, I just don't think they'll do quite as well as they did last year," Wiedemer says.
About Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.
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