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Greenspan: Greek Default Will Trigger Another U.S. Recession

European finance ministers, IMF officials and a coalition of other international institutions, are in the process of developing a new bailout program for Greece, as many maintain doubts as to whether a second cash infusion will turn the country’s economy around.

The outlook for Greece is not very bright. It is commonly accepted that the predicament in Greece is due to the economy’s inability to grow coupled with a monstrous debt burden.

Violent demonstrations have erupted throughout the streets of Athens as the public protests government efforts to implement the demands of the country’s creditors, including spending cuts and tax hikes.

Though the U.S. is not directly participating in the nation’s discussions and deliberations, Americans are viewing the process from the edge of their seats, given that if Greece defaults on its debt, a ripple effect across Europe and the U.S. may result. 
“We’ve discovered that the U.S. is very interconnected with the rest of the globe in the last couple of years,” Jon Hilsenrath, the Wall Street Journal’s chief economic correspondent said.

He added that the U.S. economy has recently been exceedingly vulnerable to shocks from across the globe, referring to the Japanese earthquake and financial turmoil in Europe over the last year. The recovery of the American market is hinderd by apprehension among businesses over long-term outlook.

According to former chairman of the Federal Reserve, Alan Greenspan, default by the battered nation could “almost certainly” trigger another recession in the U.S.

The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” he said, adding that puts some U.S. banks “up against a wall.”

As Greek government bonds have slumped, pushing the yield on the 2-year note above 30% for the first time, Prime Minister George Panandreou has failed to find support for more austerity, fueling speculation that the nation will fail to meet its obligations.

In exchange for another financial aid package, Panandreou said Greece would make significant revisions to its constitution.

Yet it is unclear whether another rescue attempt would stop Greece from becoming the next Lehman Brothers, particularly considering the first bailout program was unsuccessful.

Some say, while it eliminates the chance for further crisis, it fails to solve underlying problems.

Furthermore, it is necessary to recall that other countries such as Portugal, Ireland and Spain are in similarly hot water; and with that in mind, the potential for future financial turmoil in Europe remains and could rebound back to the United States.

White House officials expressed concern last week in regard to European leaders sluggish response to contain the Greek economic trauma, fearing its negative pull on American recovery.

In addition, if European countries collectively opt to bail Greece out of its mess, their markets will have less money to spend on American goods, further contributing to job loss. Also, if a default occurred, other troubled countries may follow suit, leading to a trend of defaults that could severely impact the European zone and potentially sending shockwaves all the way to Wall Street.

Even if Greece is able to achieve its austerity plan, there still lies the question of whether it can be effective in making Greece competitive once again. The flaw of the proposal is that the “shrinking” of the economy will make Greece’s public debt to GDP ratio soar from 127% today to an estimated 180% by 2014. Greek bondholders have been warned that they should expect on 30-50 cents on the dollar. Thus, the government and the citizens of Greece will be required to pay back this overwhelming debt with lower incomes. Many skeptics, believe that this is not a feasible solution.

Greece’s restructuring or default on at least part of its debt seems inevitable. If Greece does restructure its debt, strict austerity measures will still be implemented in order to balance the federal budget.

Ultimately, politics may play the determining role in the fate of Greece.

By. David Moenning of Top Stock Portfolios

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Leave a comment
  • Anonymous on June 24 2011 said:
    David Moening, you've hit the nail pretty much on the head here. If Greece does default, WHEN Greece defaults, who will pick up th pieces? The Russians? The Chinese? It is truly an abyss we are staring into, with no known precedent.

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