02.28.2010 0

Greek Debt Crisis: Could it Happen Here?

  • On: 03/03/2010 09:38:49
  • In: Fiscal Responsibility
  • By Kaitlyn Czajkowski

    As Greece faces billions of dollars in debt payments coming due over the coming months, the nation is attempting to avert a loan default — which would rock world markets — by implementing a series of tax hikes, benefit cuts, and begging for a bailout from their European neighbors.

    This plan of action pleases few, least of all the government employees who have taken to the streets in riot after learning that their pensions, salaries, and benefits would be cut. The news is not much better for Greece’s neighbors, France and Germany in particular, now tasked with the job of bailing the nation out to avoid the fall-out of a total economic collapse.

    But just like the Obama Administration was not going to let a systemic bank fail, Europe also won’t allow Greece to fail, Josef Joffe, publisher of a weekly German newspaper, Die Ziet, told The New York Times. “Europe has become a huge welfare state for everybody, for states as well as individuals,” he said.

    But riots in the street and bailouts from her neighbors? How did things get this bad? Unrestrained spending, cheap lending, and the lack of any significant reforms left Greece in the place she is in today — with her national debt, figured at $413.6 billion, larger than the country’s economy.

    The deficit-to-GDP — how much more the country spends than takes in as compared to the nation’s entire economic output — is at 12.7 percent. Greece’s credit rating is also the lowest in the eurozone, discouraging any new investment in the economy.

    Starting to sound familiar yet? The cause behind Greece’s economic woes are not so different from what’s also been going on right here at home. Don’t think it could happen here?

    This year alone, the deficit-to-GDP will total over 10 percent under Barack Obama’s budget. And Democrats and Republicans alike are beginning to recognize the dangerous place we’re in.

    On Monday, even the Democratic House Majority Leader, Steny Hoyer, warned “It is enough to look across the Atlantic at Greece’s extreme economic crisis and understand: it can happen here. If we don’t change course, it will happen here.”

    And while Greece may recover from her economic trials, the future may not be quite so rosy for the United States. The Greek economy is both small enough (compared to the rest of the European Union) and important enough (an economic failure in Greece would weaken the euro and the European Union) to be bailed out by her European neighbors.

    If faced with a similar crisis, the United States would not have a similar rescuer. For now, the Treasury is able to sell the national debt all over the world. But, if markets eventually force the nation’s off-balance sheet obligations on-budget — as they should be — the nation’s creditworthiness would most certainly be impaired. Fannie Mae and Freddie Mac, which were nationalized in 2008, carry alone $6.3 trillion in debts that has not yet been added to the $12.4 trillion national debt.

    When it is, the national debt will total $18.7 trillion, as ALG News has previously reported. And the impact will be catastrophic.

    After the 2008 bailouts, Senator Jim DeMint (R-SC) predicted a dire outcome here in the United States. “We’re going to have riots,” he told ALG News. According to DeMint, people will recognize the unfairness of the system when they too, like the auto companies and banks, begin to lose their jobs and feel the pinch of the economy. “The unfairness of it becomes more and more evident as we go along,” DeMint said, and while “they’re going to hurt… we don’t have the money to bail everyone out.”

    Senator DeMint is right. The chaos already seen in Greece today will spread globally as the sovereign debt crisis claims more victims. Undoubtedly, there will be severe budget cuts, and public sector employees will be particularly hard hit. Just make sure you’re out of the way when the riots begin.

    Kaitlyn Czajkowski is a contributing editor to ALG News Bureau.

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