On the last day of June the country of Greece did not make a demand 1.7 billion payment to the European Central Bank thus becoming the first developed country to default in modern times. What looms for Greece and by contagion the global economy will be decided in the next few weeks, but Americans saddled with an 18 trillion dollar debt should be concerned.
While Greece and the United States are on opposite sides of the globe, have different currencies and cultures both countries have overwhelming debt.
For Greece, the financial problems began when they joined other European countries in adopting the Euro as a communal currency in 1999. The unionreduced trade costs while increasing trade volume and made sense on the surface. Yet because Greece was geographically distant from the other countries their cost of labor rose significantly causing a large trade deficit. A deficit for a country, simply put, is spending more than receiving in government income (taxes). Many countries operate a deficit and issue bonds to balance the books.
Fiscal mismanagement, questionable government reporting and high borrowing costs did not allow a market for additional Greek debt. The United States is perceived, at least for now, as being much safer with our Treasury notes, bills, and bonds sought by investors as safe places to park cash.
Since Greek could not attract investors the money supply shrank and prices dropped. Wages soon followed, economic growth evaporated and unemployment reached 25%. No wonder why the Greek government cannot write a 1.7 billion dollar to its creditors! To be fair Greece has undergone severe austerity the last few years.
Pensions, government services, and healthcare have all been cut to the bone and the European Central Bank (ECB) is mandating additional reforms immediately. The Greek military is the second largest in NATO just behind the United States and the ECB wants it cut in half. One in three Greeks is self employed and tax evasion is rampant with Swiss banks holding stockpiles of cash; again the ECB wants legislation to get into these accounts.
I suspect the powers that be in Europe will allow Greece to restructure the debt within a short time frame, maybe three years, while insisting on immediate reform.
As for the United States the Greek default should be alarming and hit close to home. Our nations debt ($18,000,000,000,000.) is growing by over two billion dollars a day!
A quick visit to U.S. National Debt Clock : Real Time is a sobering reminder that at some point we must pay the money back. There are roughly 321 million Americans and each of us
"owes" $56,591. As interest rates rise servicing the debt becomes more expensive. At some point investors will want a higher yield to lend America any more money. It could be two years or twenty yet when investors inevitably begin to question our ability as a Nation to pay our bills; this Greek default will be a drop in a bucket compared to a tidal wave of foreign governments wanting their money.
Will a Greek Default hurt America?