What Greek Debt Talks Mean for U.S. Investors

greek debt talksThe Greek debt talks that have been playing out over the past week have pitted Germany against Greece.

Of course, there's a smattering of Eurozone finance ministers offering their voice to the meeting, but one player seems conspicuously absent from these talks...

We'll discuss that in a moment. But first, here's an update on where the Greek debt talks are now...

Greece and Germany Still at Loggerheads

The Eurogroup convened last week in Brussels. Eurozone financial officials all gathered in hopes to flesh out an agreement over Greece's crippling debt.

On one end of the discussion, there's Greece.

Greece wants to renegotiate the terms of two bailouts - authored by the European Union and the International Monetary Fund at the height of the Eurozone financial crisis - totaling 240 billion euros ($274 billion). But before they can embark on more substantive negotiations over those loans, they need to wrangle about 10 billion euros ($11.4 billion) in bridging loans out of the Eurozone to keep the country funded in the interim period.

On Feb. 28, a regional aid program is set to expire. And without help from the Eurozone, Greece won't be able to pay its bills. That will lead to an inevitable "Grexit" - a situation where Greek exits the euro and reverts back to its old currency, the drachma.

On another end is Germany. While Germany has always been committed to keeping the Eurozone together, they're growing increasingly tired of Greece. And what's worse, they're becoming more receptive to a Grexit if Greece doesn't play nice with Germany's calls for austerity.

You see, Germany is the richest of the Eurozone countries. Any failure on Greece's part to repay its IMF-EU loans, which were built up by the fundraising efforts of Eurozone members, will hit Germany the hardest. As the strongest economy, it is also the largest creditor to Greece.

Germany is more than willing to help Greece - that is, if Greece adheres to a regimen of strict austerity.

There's one big problem though. Greek elections last month put into power an anti-austerity government. The Syriza party, led by Prime Minister Alexis Tsipras, won on a platform of no austerity. Syriza seized on populist discontent. They blamed Greece's worsening economic situation on the austerity measures attached to the first two bailout packages.

And that's how the battle has played out. It's had on one end a stalwart, unmoving Germany who wants to see Greece exchange Eurozone generosity for austerity. And on the other end, there is a Greek government beholden to an electorate expecting Greece to hold firm on its promises of no more austerity.

But while those two major players headline all the financial news today, investors seem to forget who stands to lose a lot should Greece fall.

The United States.

Greek Debt Talks Have Huge Implications for U.S. Investors

As the Greek debt talks continue to hit snags, the market reaction is predictable. There has been an obvious sell-off in Greek equities, but no panic. And the German markets have slid marginally.

But the Dow Jones today seems unmoved. The DJIA is up about 15 points at mid-afternoon, or around 0.1%. Greek debt talks are crumbling, but U.S. investors don't seem to care.

And that's a big problem.

The U.S. is not immune to any problems that could arise from a breakdown of negotiations between Greece, Germany, and the greater Eurozone.

That's because of a looming $1.5 quadrillion weight hanging around the global economy's neck: the derivatives market.

"You're talking about the broader implication of 300-something billion euros in a daisy chain of derivatives traders at which point are $1.5 quadrillion," Money Morning Chief Investment Strategist Keith Fitz-Gerald said last week on an appearance on CNBC. "All of which are collateralized, cross-hedged, and traded against U.S. Treasuries and other government paper worldwide."

A Greek default is not only a hazard to Greece. It's not only a hazard to the euro. It's a hazard to the global economy. The more than 300 billion euros of debt Greece holds is not the only pile of money that stands to be wiped out by Grexit.

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There are credit default swaps traders who expect a Greek credit event to bring to them a big payday - at the expense of swaps dealers who didn't expect a Greek default. There are interest rate swaps, cross currency swaps, and every manner of derivatives attached to that 300 billion euros that could threaten the health of the global economy should Greece fail to meet its debt obligations.

At the moment, the only spokesperson for the global economy at these Eurogroup meetings is the U.K.'s chancellor of the exchequer George Osborne. While Osborne has been urging reconciliation on the Greek debt deadlock, the finance ministers of Germany and Greece have drowned his voice out.

Nobody seems to care about the U.K., a country that doesn't use the euro. But Osborne knows that the U.K., and the global economy, is heavily exposed to the euro. And his message is on-point: any failure on Greek debt talks has implications for the global economy that far exceed the political crises and social unrest of one small Mediterranean country.

The Bottom Line: Don't take solace in the fact that if all else fails in these contentious Greek debt talks, Greece can just leave the Eurozone. Greece's debt may seem minuscule when we're looking at the global economy, but as Money Morning's Fitz-Gerald has said "there's one dollar in the system for every nine dollars out there." A Greek default will ripple through the economy, and the U.S. is not insulated from this, despite the Dow Jones today suggesting otherwise.

Here's What Quadrillions in Derivatives Looks Like... The derivatives market is large. And unregulated. At this point, this massive global market is so large that nobody can pin an exact dollar figure to it. Estimates value global derivatives at somewhere between $600 trillion and $1.2 quadrillion. How much is that exactly? Well, you could stack that many one-dollar banknotes and it would stretch from Kennedy Space Center to Venus - three times! Here's just how big this derivatives market is...