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NetRight Daily » Greece In Ruins, Can It Ruin All Of Us?

netrightdaily.com2/17/12

By Frank McCaffrey — Here is an illustration of what financial woes in Greece can mean for the rest of us. Hear from ALG's Robert Romano on the domino, or should we say pillar, effect of Greece's financial problems.

EUR Remains under Pressure as Greece Concerns Persist

jutiagroup.com2/23/12

The euro remained under pressure against the US dollar throughout yesterday's trading session, as investors remained cautious regarding Greece's financial situation. The EUR/USD spent much of the day range trading …

The Idea That The US Is Similar To Greece Is Not Nearly So Farfetched As It Sounds.

In Less Than 20 Years US Debt Could Exceed Its Income

Greece

Greece is so deep in debt and its economy is in such chaos that there are now national strikes, and violent street protests and its pensions are on the verge of collapse.

Why?

Because Greece owes so much money to other countries.

Greece’s economy is now so bad that it’s government is having to beg for even more loans at even higher interest rates just to stay afloat.

The U.S.

The U.S. government’s present financial obligations will result in a national debt of around $20 trillion by the end of this decade and taxpayers will have to pay about $1 trillion a year, just to cover the interest.

So How Bad Is $20 Billion?

Bob Greenstein who works with the liberal leaning Center on Budget and Policy Priorities says,

"Our economy is much stronger, and our financial system is much stronger, but you know even if we experienced just a fraction of the problem of Greece’s, it would really be a very painful experience for us".

"If you wait ’till the crisis hits then your options may be more constrained and you may have to take action that’s more draconian and hits the average American in painful ways".

It’s true of course that the U.S. is much stronger, but it’s also true that the U.S. is headed down the same dangerous path and The Congressional Budget Office projects U.S. interest payments on our debt will quadruple over the next decade, becoming the largest single item in the budget.
Doug Holtz-Eakin, who is a former director of the Congressional Budget Office and was a campaign adviser to the 2008 presidential nominee Sen. John McCain, R-Ariz., notes that,

"In 2010 we’ll be paying $916 billion in interest alone. So we’re really borrowing just to pay interest and we are steadily getting to the point where we’re getting a new credit card just to pay off the old one".

The financial-rescue plan that Treasury Secretary Timothy Geithner is set to unveil today (February 10, 2009) could well determine how effective the stimulus will be as a whole, but the as yet unheard strategies are already dividing both bankers and investors.

For the plan to work the government will need to borrow in order to invest in things such as new business projects, credit for purchases of new cars, homes and appliances and if it can’t get the money then companies and households will be unable do their supposed part, which would be to spend the economy out of its present mess.

Former Federal Reserve Governor Lyle Gramley had this to say, “We’re going to get limited benefit from the stimulus program unless people can finance their normal operations and we really haven’t seen any breakthrough yet in the credit logjam”.

Investors are seeking a 5.2 percentage-point premium over U.S. Treasuries to buy bonds being sold by companies with investment- grade ratings which is over five times the level that it was two years ago and the rate on jumbo mortgages is 6.91 percent, almost 1% higher than at the start of 2007.

There is almost unanimous agreement that something needs to be done and done soon to get the economy out of its present doldrums but there’s not much consensus on how to do it however.

Christopher Whalen, who is the managing director of ‘Institutional Risk Analytics said in an interview yesterday,

“If banks can’t move mortgages off their books, then we have a problem. We will see credit availability much lower” than in past generations. We have got to fix the financial system and if we don’t deal with this, we will not get anything else done”

Stuart Eizenstat, who is a former deputy Treasury secretary in the Clinton administration said,

“The government will in effect put a floor under those assets. If the value goes up, the investor gets the benefit. If the value goes down, the government picks up that, but it’s much less of an immediate expenditure than you would have if you purchased them. Guarantees may also play a role for investments banks intend to hold to maturity”

Furthermore, many would be investors also remain unconvinced that the government is moving in the right direction.

“It will be a bad decision for a hedge fund to invest in these illiquid assets. You’ll end up running into the same problems as the banks and the hedge fund industry is suffering as it is already” announced Kenneth Windheim who is the chief investment officer of ‘Strategic Fixed Income LLC’, that manages $1.7 billion in assets and invests with hedge funds.

The financial rescue needs to “create an improving credit market to ensure that the stimulus works”, said Bruce Kasman who is the chief economist at ‘JPMorgan Chase & Co.’ in New York and is a former Fed researcher.

Another possibility that officials and regulators have suggested is the setting up of a government-funded “bad bank” that would buy up most if not all of the toxic debt but New York Senator Charles Schumer said that it would be “very expensive and cost as much as $4 trillion, and risked setting values for the securities so low that every other bank would go bankrupt”.