Let’s face it: Most Americans could care less about Greek’s deteriorating financial condition. After decades of spending beyond its means, debts run up by the birthplace of democracy equal 180 percent of its GDP – even after receiving a $110 billion euro bailout.
Taxes account for 40 percent of GDP, yet the Greek government continues to run deficits of some $30 billion annually for fear of massive social unrest when the gravy train stops. On October 27th, Eurozone and International Monetary Fund leaders reluctantly agreed to accept a 50 percent write-off of some Greek debt to reduce it to “only” 120 percent of GDP by 2020.
As a result, interest rates on Greece’s two-year bonds have soared to 55 percent due to the enormous risk that they will never be paid off, and the country is down to less than $10 billion in foreign reserves. But Greece can’t refinance to get the debt monkey temporarily off its back because it can’t afford the ridiculously high interest payments.
“Cry me a river,” most Americans will say. Why should we be concerned about a country so recklessly profligate that it pays government retirees 92 percent of their pre-retirement salaries?
“Much like a tropical depression incubating into a terrible hurricane, the Mediterranean contagion is likely already underway,” University of Maryland business professor Peter Morici wrote in a New York Post column last week.
“Contagion is alive and well,” agrees Rebecca Patterson, chief market strategist at J.P. Morgan Asset Management.
It’s already infected Italy, the Eurozone’s third largest economy – which is $2.5 trillion in debt and hasn’t experienced any real economic growth for nearly a decade. Yields on Italy’s 10-year bonds are up now to 7.47 percent – above the 7 percent analysts consider the tipping point. And if Italy tanks, most economists agree, there goes the euro.
Although U.S. banks would take a hit if the euro flames out, the real danger, Dr. Morici told The Washington Examiner, is that domino defaults in Greece and Italy will set off a “loss of confidence in government guarantees.”
The resulting stampede from the euro to U.S. Treasuries will initially seem like a good thing, “until they start taking a closer look at the U.S.” – whose own indebtedness ($14.9 trillion and rising, with $63 trillion in unfunded entitlements) has increased at an unsustainable rate over the past four years.
Investors may well decide that the U.S. government isn’t in that much better shape than the deadbeats in Europe, Dr. Morici pointed out.
If they either stop loaning the Treasury money or demand much higher interest rates to cover the added risk, the federal government would have few options to make up the difference. One is a major inflation by the Federal Reserve, which would reduce the value of every U.S. dollar in circulation.
That’s why Americans should be very concerned about what happens to Greece and Italy. We could be next.
