While Treasury Secretary Timothy Geithner [3] was on the talk shows [4] reassuring America that the economy is healing, developments in Europe threatened to cut the legs out from under a U.S. recovery.

The short story is that Greece and a number of other European Union (EU) countries are in debt, deep in debt. EU rules say member countries cannot have budget deficits that exceed three percent of GDP. Greece’s debt is closer to 12 percent.

They have been hiding it for years, in part relying on major U.S. banks and so-called “cross-currency swaps,” complex financial instruments that allow governments to hide their debts and push their liabilities into the future. The German magazine Der Spiegel [5] broke the story that Greece did a billion-dollar swap with Goldman Sachs [6] in 2002 that did not show up on the nation’s books as debt.

Now the bill is coming due. Greece is in trouble and EU leaders are failing to take decisive action, roiling the markets. The Euro is trading near an eight-month low against the dollar and some are predicting another major shock to the global financial system.

Former IMF economist, Simon Johnson, sounded the alarm and slammed [7] European and U.S. leaders for not taking the crisis seriously: "They seem to show no awareness at all that much of Europe is facing a serious crisis and it's not limited to Spain, Greece and Portugal, it's also going to include Ireland. I think Italy is also very much in the line of fire. There's a very serious crisis inside the Eurozone."

What does this have to do with U.S.? While Geithner and others are predicting blue skies, we still don’t know how enmeshed U.S. banks are in the crisis. Moreover, U.S. banks are weak and undercapitalized and may not be able to take too many more shocks. According to Johnson [8]: “As the international situation deteriorates – or even if it remains at this level of volatility – banks will hunker down and credit conditions will tighten around the U.S. And if the European situation spins seriously out of control, as it may well do early next week, the likelihood of a double-dip recession (or significant slowdown in the second half of 2010) increases dramatically.”

For Better or Worse

Will the rich nations of the EU live up to their vows and come to the rescue of troubled Greece? Will the EU allow a new suitor, the IMF, to come to the rescue? Will the Greeks default and be divorced? Stay tuned, this marriage is on the brink, and the consequences for the rest of us may be dire.