Greek crisis coming to the USA?

SUBHEAD: Germans to debt-ridden Greeks "Sell the Acropolis. And a few islands." Image above: The Acropolis in Athens, the seat of the origin of Western Civilization. Painting by Pantelis Zografos. From ( By Niall Ferguson 10 February 2010 in Financial Times - (

It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union, other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is “seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”, but at this point nobody wants to pretend that Greece’s yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.

That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history –

• Reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years.

• Outright default on all or part of the Greek government’s debt.

• Most likely, as signaled by German officials on Wednesday some kind of bail-out led by Berlin.

Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horse-trading before one can be reached.

Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalized world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect.

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.

Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.

Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $15,000bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months.

The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue – from a tenth to a fifth to a quarter.

Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government): “How long can the world’s biggest borrower remain the world’s biggest power?”

On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.

• The writer is a contributing editor of the FT and author of ‘The Ascent of Money: A Financial History of the World‘

Sell the Acropolis

Athens' Acropolis was closed to visitors Feb. 24 because of a general 24-hour strike in Athens. Workers were protesting a wage freeze and tax hikes imposed as part of a government austerity plan. Now, some German MPs suggest Greece should sell the Acropolis and a few islands to reduce their burgeoning debt.

Greece’s tourism slogan is “a masterpiece you can afford.” But when they coined the phrase, they were probably not thinking of selling Greek islands at cut-rate prices.

As Prime Minister George Papandreou heads to Germany tomorrow to ask German Chancellor Angela Merkel for help in the Greek debt crisis, two members of her coalition have some advice: sell off your islands to pay off your debt.

The comments, by two members of the German parliament, were published in the German newspaper Bild under the provocative headline: “Sell your islands, you bankrupt Greeks! And sell the Acropolis too!” One parliamentarian, Frank Schaeffler, told the newspaper, "the Greek government has to take radical steps to sell its property – for example its uninhabited islands.”

IN PICTURES: Top 10 things Greece could sell.

With Communist-party affiliated unionists occupying the Ministry of Finance and gray-haired pensioners scuffling with police outside his office, Mr. Papandreou may feel he’s been radical enough. Speaking to Greeks yesterday after a raft of new austerity measures were announced, he said that with the tough measures, Greece had done its part and that now it was time for Europe to come to the country’s aid.

But the comments by the German MPs are likely to further inflame growing anti-Germany sentiment here.

On the right and left, Greeks have been angered by the way they’ve been portrayed in some German media as cheating spendthrifts who lied their way into the European Union. Greek politicians and newspapers responded by dredging up the specter of World War II, and Germany’s brutal occupation of Greece.

On its website, the leftist Greek newspaper Eleftherotypia ran a photo of the Acropolis with a "for sale" sign superimposed

Not funny

Dimitra, a 25-year-old student and part-time nanny who was occupying the Finance Ministry Wednesday afternoon and declined to give her full name, thought the German MPs comments were a joke – but in very bad taste.

“Are they crazy?” she said, with a shake of her head.

But like many on the left, she doesn’t necessarily think Germany should bail out Greece. Instead, she says the money should come from big companies and international banks. “The working classes, in Greece or Germany, should not be forced to pay. Those with money should pay."

About 2.5 million Germans come to Greece each year to sun themselves on the country’s beaches or tromp through its ancient sites. Tourism is one of Greece’s largest industries and Germans among the country’s best clients

But this year, if Germany’s government doesn’t lend a helping hand to Greece, German visitors may get a frostier welcome. Greeks say they’ve forgiven the war, but they haven’t forgotten.

1 comment :

Mauibrad said...

And the latest on Iceland:

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