June 20, 2011
Hardly a day goes by that financial markets are not buffeted by news of a looming default of Greek sovereign debt. After years of high government spending on public-sector salaries and an expensive social safety net, the bills are beginning to come due. With a large outstanding debt, Greece needs money to pay its bills, but many Greeks appear to prefer ducking out on paying the tax man.
If Greece defaults, what might that mean to us? In direct dollar terms, not much. Greece has over $400 billion in outstanding debt, but relative to the size of US debt markets, that's a modest number. I don't see any meaningful direct effect on our economy if Greece defaults on its obligations. But the echo - that's where we could have some trouble.
By "echo", I mean the possible effect on our economy if bond buyers around the world begin to perceive US government debt to be like Greek debt: a risky investment. Investors demand higher rates from risky investments, and higher rates on government bonds would translate into higher rates for everything else. Higher rates would mean a slower economy and higher unemployment - nobody wants that.
There are people who consider the Federal Government a risk already, but they are in the minority. Demand for US Treasury bonds remains strong. Our government should act very carefully to see that it remains so.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).