As Italian Drama Persists, Fears of Credit Crunch Spread to Small Businesses

November 10, 2011

By Catherine New

The Atlantic Ocean is wide, but maybe not wide enough. On Thursday, markets had a mixed reaction to the deepening economic crisis in Europe. With Silvio Berlusconi's exit as Italy's prime minister, the nation is expected to name a new government within days. Some sources reported that the European Central Bank would step in and buy Italian bonds, easing fears that yields of more than 7% would cause the European economy to fracture.

In the U.S., small business owners grew nervous, while the equities markets took a slight hit. The crisis impacted oil prices, which fell on Europe's political news but were buoyed by reports of weak U.S. supplies. Gold prices fell nearly 2% to just above $1,750 an ounce, as the sell-off included precious metals. The wider commodities markets took a hit as well, with holiday treats like chocolate and sugar both trading down.

"The European economic crisis is definitely concerning as we're in a global market," said Danielle Snyder, the co-founder of DANNIJO, a New York-based designer jewelry and accessories company, and a member of the HuffPost Small Business Board of Directors. "The crisis has weakened confidence in spending abroad. Fashion in particular is an international business and Italy is one of the most influential countries in the game," said Snyder, who adds that her company has grown its European presence in the past 18 months.

"The crisis is a big threat -- don't mistake the damage this can do," says Clint Greenleaf, the founder and CEO of Greenleaf Book Group, an Austin-based independent publishing company, and another member of the HuffPost Small Business Board of Directors. "A hiccup in Europe can create havoc here, so it causes great concern. As with any crisis, there is both threat an opportunity right now, we should all protect ourselves in case the storm is strong.

Even though they won't push the U.S. into another recession, Europe's problems will tighten U.S. lending and spending for the near term, said Alan Levenson, chief economist for T. Rowe Price. That could lead to a decline in asset values and wealth for American consumers and rise in savings rates. Translation: Slow growth through the end of the year and into early 2012. That won't help the growing U.S. deficit, already troubled by one credit downgrade this year.

Wednesday's global market sell-off was prompted after Italian 10-year bond yields broke the 7% level that had already sent Greece, Portugal and Ireland to the hand-out line. But Italy could be cushioned by its diverse labor pool and strong export sector, which give it a stronger ability to recover than its fellow European debtors. For all of Europe, however, Italy's problems accelerate a recession that is already under way, said Levenson.

The question now many are asking is: Is Italy too big too fail, making all this just another round of economic brinksmanship with Italy basically giving the economic equivalent of a crude hand gesture to the global market, said Joseph S. Fichera CEO of New York-based investment firm Saber Partners, LLC. "Italy has the ability to pay, but not the willingness," he said.

© 2011, Daily Finance, November 10, 2011