Woe to Greece? Woe to Us

05/11/2010 11:58 am EST

Focus: MARKETS

James Oberweis

Editor, The Oberweis Report

Jim Oberweis, editor of The Oberweis Report, and analyst Ken Farsalas say the Greek credit crisis should remind Americans that overspending can catch up with you.

Greece is known as the cradle of western civilization, the birthplace of modern democracy, politics, philosophy, mathematics, and science. Apparently the Greeks didn’t invent economics (despite being derived from Greek), because these days, Greece is also known as the birthplace of the sovereign debt crisis.

So, what exactly is wrong with Greece? Too much debt. According to Eurostat, the Greek government ran a budget deficit equal to 13.6% of [gross domestic product] in 2009 and will tally a total debt load equal to 124% of GDP in 2010.

Worse, Greeks are notoriously poor at saving money, meaning that it will be harder for the country to recover even after other European countries provide relief. According to Credit Suisse, Greece has the lowest gross national savings ratio of any large country, saving 4% of estimated 2010 GDP. In contrast, the Chinese are expected to save 49%, and the Germans 23%. No wonder thrifty Germans are ticked about a proposed bailout of those careless Greeks.

As a result, Greek bonds have collapsed, and the spread between ten-year Greek bonds and ten-year German bunds has skyrocketed to nearly 600 basis points [hundredths of a percentage point]. Credit default swaps on Greek debt—the cost in percentage terms to insure against Greek default—have also rocketed higher. Standard & Poor’s downgraded Greek debt to “junk” status on April 27th.

The Greek crisis is also shining a light on other European countries with debt issues, and S&P recently downgraded the debt of Portugal and Spain. The European Commission expects the Portuguese government’s gross debt to be 84% of GDP in 2010, and the Spanish will have a gross debt level of 66%. Ireland and Italy, the other two countries most often cited for excessive debt in Europe, are projected to have gross debt/GDP ratios of 82% and 116%, respectively.

But maybe the Greeks are trying to teach western civilization a new lesson—that runaway government debt ultimately corrodes an economy from within until it collapses under its own weight. Rather than snicker, maybe we should take heed.

You see, the American people, with our AAA government bond rating in hand, are obliviously strolling down a similar path as the Greeks and their European cousins. We’re racking up an astounding amount of debt.

According to a Congressional Budget Office estimate, the US government will run a budget deficit of $1.35 trillion in fiscal 2010 and push its total debt to more than $13 trillion. The IMF projects that US government debt will jump from 61% of GDP in 2006 to 100% of GDP in 2014. Credit Suisse says we will save only 10% of GDP this year. Only the Greeks are worse among large countries.

The talking heads on TV, of course, say US Treasuries will never lose their AAA rating. Nonsense. We’re on a collision course with that very reality. You think Greece is a calamity? What if our day of reckoning comes? It would be a catastrophe.

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