Why should Americans care about Greece?

By Felix Salmon
May 3, 2010
on All Things Considered Sunday, talking about "why Europe's debt crisis matters to Americans". It's a question I've been asked quite a lot of late, and I have to admit I'm having difficulty answering it. I'm a sovereign-debt geek -- just ask me about collective action clauses, exit consents, and the Sovereign Debt Restructuring Mechanism next time you're suffering from insomnia -- so I naturally find all of this fascinating. But I appreciate that not everybody else does, and I'm having difficulty working out whether they should or not.

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I was on All Things Considered Sunday, talking about “why Europe’s debt crisis matters to Americans”. It’s a question I’ve been asked quite a lot of late, and I have to admit I’m having difficulty answering it. I’m a sovereign-debt geek — just ask me about collective action clauses, exit consents, and the Sovereign Debt Restructuring Mechanism next time you’re suffering from insomnia — so I naturally find all of this fascinating. But I appreciate that not everybody else does, and I’m having difficulty working out whether they should or not.

So, I have two questions, if I may:

  1. Should the prospect of default in Greece or elsewhere in Europe concern the average American?
  2. If so, why?

All answers gratefully accepted.


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The Greek crisis raises questions about the financial stability and growth prospects of Europe, a major trading partner. It suggests some European governments are at the limit of their ability to borrow, and to stimulate their economies in response to a further downturn. It raises questions about the stability of the euro, which is an important facilitator of intra-European trade.

So the situation is bad for the growth of a major partner, with a remote possibility of catastrophe.

The story also prefigures policy issues here in the US. All governments face constraints on their ability to borrow, and as they press against those constraints the costs and difficulty of borrowing eventually become prohibitive. The US is far stronger and more flexible than Greece, but those constraints still apply to us. We will at some point face debates of deficits similar to those underway in Greece and Germany.

Posted by chernevik | Report as abusive

Besides being a dramatic tale that confirms our prejudices, the Greek story adds an important variation to the borrowing-for-consumption vs. borrowing-for-investment issue. This hasn’t been part of the financial crisis in the US– but the Greek crisis (+ contagion) shows how that can happen.

Posted by MattF | Report as abusive

It’s hard to find compelling reasons, aside from cheaper imports and vacations.

But you can construct US-versions of the basic Greek-debt-crisis scenario; the problem is making them plausible.

The Greek debt crisis is a basic sovereign-debt crisis compounded by the fact that Greece is stuck in a currency union; they can’t print money to pay off their debt. That’s precisely the situation of US states and municipalities. It is not hard to find examples of states where the politics of the budget process presently seems as out of control as the worst European states; California comes to mind, but I’m sure your readers can name many more. Other places have just been hard hit by the recession (think Detroit.) And the federal politics are the same; federal voters don’t want to come to the aid of state or municipal voters who are reluctant to raise their own taxes/cut their own spending. At the same time, federal politicians know that bailing out Detroit or California will only create dozens more demands for federal aid.

So the question is whether those regional problems can start to give the markets enough doubt to generate important problems. The big question is, who’s got enough debt for the market to worry about? (bonus points if most of the debt is short-term to save on interest costs and maximize rollover risk.)

Posted by S_van_Norden | Report as abusive

in my eyes, it comes down to a simple analogy – remember studying those on the SATs many years ago? here goes:

Greece:E.U. :: Insolvent US Municipalities : U.S.

it’s a roadmap for handling our own insolvencies of our “semi sovereigns” who can’t print their own currency… like California.

i fear that the moral hazard precedent of bailouts of these entities quickly spirals downward into a tragedy-of-the-commons inspired race to the bottom, where everyone (every state) spends as recklessly as possible, knowing Uncle Sam has their backs.

Posted by KidDynamite | Report as abusive

Of course it’s germane. The central thrust of the Democrat program is to make the US more like Europe. And they are doing a damn good job at it. However the Greeks get 14 months pay for 12 months work in both the public and private sector. Even in the most recent bailout package this benefit was only modified slightly. So when are we going to get 14 months pay for 12 months work? I could use the money.

Posted by Viator | Report as abusive

Felix, you raise a good point. for sovereign debt geeks and bond people like me, this story has unfolded before out eyes ever so slowly over the past 18 months with obviously far reaching consequences for the EMU project.

But for the average american the negative fallout from the whole saga seems negligible, if anything the net result is lower US interest rates from the safehaven bid into UST’s.

Obviously if the flu spreads into Spain (where unemployment >20% and NPL ratios have remained conspicuously low and a major Spanish bank with tentacles across the US and LatAm gets into trouble, it’s a different story. It’s a bit of a stretch to get there right now but that was the prevailing attitude in 2007 as subprime began.

Posted by MFM | Report as abusive

Yes, the Greek debt crisis should concern the average American because of what it could portend politically, not economically. A strong, integrated Europe would forestall an American-Chinese cold war for supremacy this century. If Europe fractures back into its smaller component countries, then the world will lose an essential part of its current dynamic international system. As an example, an independent third-party can create the exciting, fluid political race occurring now in England versus the stagnant, bitter bi-polar quagmire within the US Congress. If Europe lives then the world this century will be more like the former, but if Europe dies then, just like the latter, a cold war mentality will slowly set in between China and the United States. It’s human nature.

Posted by Mustard | Report as abusive

We should care because we (to a major extent) are funding their bailout, via the IMF.

Posted by DanHess | Report as abusive

It shows what happens when you spend endlessly on social programs with money that the government does not have. There is a bond crisis come to our shores at some point; it is inevitable.

Posted by DanHess | Report as abusive

Well, the average American is helping to fund the bailout, via the IMF’s contribution, so in a narrow sense should obviously be concerned. Presumably what you are really asking is, how can America’s involvement be justified?

I have difficulty buying into this “analogy argument” proposed in several comments. For one thing, I think the odds of Greece still being on EUR five years from now are still very small, whereas conversely California will almost certainly remain part of the union and continue to use USD.

However, I would not be as sanguine as MFM about the buying pressure on USD assets that would be consequent on threats to EUR. This seems to me the problem rather than the solution, making it that much harder for America to bring its current and capital accounts into closer balance. America will not be happy if the euro’s contribution to absorbing global economic imbalances is reduced.

Finally, I think there is some sense in the political argument: the world’s affairs are to a great extent arranged by Americans for Americans. It follows that changes to the status quo are likely to be disimprovements from the American perspective. America pays heavily for its privileges, spending over 4% of GDP on the military (almost exactly the same as Greece, as it happens.) It makes no sense to fund this exorbitant diplomacy-by-other-means but shy away when cheaper opportunities for influence present themselves. Foreign policy is a jigsaw puzzle and every piece must fit.

Posted by Greycap | Report as abusive

There’s a very simple connection for Americans. A Greek default will cause a further slide in the Euro and a rise in the dollar. US exports will be harmed and our economic recovery will be that much harder.

Posted by lknobel | Report as abusive

When a house on your street gets foreclosed, your own house loses value – automatically.
I admit it’s not a very good analogy, but it goes to say that should Greece or any other European country default, investors may be less enthusiastic about sovereign debt, US debt included, and the US government would find it harder to subsidize various sectors of the US economy with borrowed money.

Posted by yr2009 | Report as abusive

1- The Average American Taxpayer probably doesn’t even know he or she is directly funding the IMF Bailout. US and Japan currently make up some 40% of the IMF. Both of these countries are in a deep deflationary asset cycles. Thus the drunken money printing/QE from these two countries to get inflated bubble values back.
If Greece Defaults, which they will, this poses another round of deflationary pressures which means just more QE, more drunken money printing, and more currency/deficit pressures.
2- Even though US Banking Institutions have minimal Direct Greek exposure, our banks have major exposure via European Banks. European and US Banking institutions are highly connected and tightly coupled.
3-Disruptions in US Markets like the fall out from Russia default form 1998.

Posted by JayTrader | Report as abusive

My God! can Americans only reason by analogy?

Posted by CDNrebel | Report as abusive

CDNrebel said:
My God! can Americans only reason by analogy?

Yes! First to CDN and then to Felix.

And they vote people into office for status and good looks as well.

Forgive them, as these things happen when profit and greed trumps adequate education.

Our monetary systems are too interconnected to not feel some ripple effect.

Posted by hsvkitty | Report as abusive

1. Financial crises don’t stay confined to the financial sector: they affect Main Street maybe worse than Wall Street/the City.

2. Isn’t Greece simply the first and worst of the sovereign debt dominos within the Eurozone? And if very many more of the dominos fall, aren’t we back in Financial Crisis II, with far less in the way of available resources to stem it/reflate the real economy?

3. Somebody at my work asked me if the U.S. or the U.S. banking system was exposed. The answer, from the FT’s work was, effectively, no–to the Greek government bonds. To the credit default swaps built on those bonds, real or synthetic, who knows? Citi could be insolvent, again, as we speak… (When I said that, he looked like he had swallowed a lemon.)

4. What others have said about the interconnectedness of the megabanks, made obvious by the Lehman fallout.

5. A cautionary tale of where the U.S. could be headed if we spend more decades singing “Don’t Worry, Be Happy”, with Vice Presidents who believe that “Deficits don’t matter”.

Posted by dellbell | Report as abusive

Speaking of bad analogies, stewart catches them by the bucketload in the goldman abacus reporting. I would avoid analogies all together Felix(not that you could ever come off as awkward as any of stewarts catches) and say that it matters to the average american due to market and currency stability and the ability for governments to continue fiscal planning to deal with the great recession.

http://www.thedailyshow.com/watch/mon-ap ril-19-2010/these-f–king-guys—goldman-sa chs

Posted by wolphkaat | Report as abusive

Default in Greece or elsewhere in Europe matters because of the follow on effects. Default means some assets are losing value; whoever holds those assets has lost money. This loss of value can lead to the debt-holders defaulting, and so on.

There are several European banks too large for their country to save, and there does not seem to be an effective cross-European institution to bail them out.

Finally, in a credit based economy such as ours, debt destruction is deflationary. Deflation is scary.

Posted by MattJ | Report as abusive

Americans ought to care about the consequences of herbicidal warfare in Vietnam, but most of them don’t. Americans ought to care about the use of Willy Pete against civilians in Iraq, Gaza, Colombia etc. but again, they don’t. Americans won’t care about Wall Street’s asset-stripping of other sovereign nations until they realize it’s exactly what happened to their own back yard.

Then all of a sudden, they’ll care… a lot.

Posted by HBC | Report as abusive

The two questions are indivisible.

You should worry in the same way that concern after World War II produced the Marshall Plan: the EU is a trading partner and a democracy (allegedly). There are at least five other members with roughly the same problems as Greece.

You should worry about Greece as a long-term parallel for the US: as in fine, get yourselves a decent healthcare system, but pay off more of that deficit than you do at the moment.

You should worry because Greek (and European) bond issues are getting a bad name. PIMCO, for example, has switched emphasis towards emerging economies, declaring EU debtors too high a risk. They’re right. One day in the future, this could easily apply to the US too.

You should worry because with the insane decision yesterday by the European Central Bank to let Greece exchange its junk bonds for Euros, the EU is effectively giving vodka to an alcoholic. If the Euro economies go bust, that makes a very weak market for expensive US goods. Further pressure on the Euro because of the undertakings now accepted by the ECB mean an expensive dollar. Great for US tourists, lousy for exports. And without more exports, the US deficit keeps climbing.

You should worry because the Germans (big on fiscal discipline) and French (let’s face it, they invented laissez-faire) have diametrically opposed views on how to deal with the big EU debtors. In the medium term, the whole EU fabric stands threatened by this inability to accept that Europe isn’t a bottomless pit of money. Were the EU to break up,you’d be back to 27 trading contacts rather than one – with the protectionist folks in the ascendancy.

You should worry because a weakened Europe won’t stand up to an increasingly expansionist Putin. Rasputin already has his eyes on the Ukraine, and he won’t pull out of Ossetia. Russia is the cutest player in the energy wars, and adept at cyber tactics to damage pcs involved in everything from security to trading.

So yup, you should worry already. But don’t think of it as Greece: think of it as a big, fat borderline repressive superstate about to collapse under the weight and hubris of its own bureaucrats. Its breakup may well be bad for America, but lots of Europeans will be glad to see the back of it.



Posted by nbywardslog | Report as abusive

Here’s the question for Americans — would Californians accept austerities similar to those now being imposed upon Greece? For the specifics of how the “Greek plan” would translate into a “California plan,” visit the link below and post your opinion:

http://wjmc.blogspot.com/2010/05/how-wou ld-californians-react-to.html

Thank you for the opportunity to comment…

Posted by mckibbinusa | Report as abusive

Why is it that the large majority of financial commentators, when talking about fiscal belt tightening. seem to focus on restrictions on entitlement programs like Social Security of Medicare. These programs do not have a more significant burden on the American tax payer than all the many ways that business is benefitted by governmental support. Why is it that Safety net social expenditures are characterized as the ones that will sink the fiscal integrity of our country, whereas all the ways the government supports business are characterized as necessary for our economic well-being. I would suggest that the well-being of individuals is at least as important as that of our businesses, and that any considerations of belt tightening should consider reductions in business subsidies.

Posted by rruss | Report as abusive