Greece and US – what in common?

One could never understand what stands in common between these two countries. But Greece may soon like the US be faced with deciding which bad choice to make among a very small set of really bad, difficult choices.

Greece is disturbingly close to a debt compound spiral as much as we know jolly well about the US situation. Even a small increase in interest rates will have a big impact on these economies. And at some point, the bond market is not going to ‘go-along’ for the ride and there will be a limit to market tolerance.

The interest spread between 10-year Greek bonds and German bunds has jumped more than 170 basis points. Greek debt has decoupled from Italian bonds. Athens can no longer hide behind others in EMU’s soft South. Euro membership now has to work extremely hard to block every plausible way out of the crisis and this is what happens when a facile political elite signs up to a currency union for reasons of prestige or to snatch windfall gains without understanding the terms of its Faustian contract.

The newly-elected Hellenic Socialists (PASOK) of George Papandreou confesses that the budget deficit will be more than 12% of GDP this year – four times than original claim for the last lot. Communist-led shipyard workers have already clashed violently with police and some 200 anarchists were arrested in Athens and Mr Papandreau has mooted a pay freeze for state workers earning more than E2,000 a month to fight for fiscal prudence. Without drastic cuts, Greece’s public debt will rise from 99% of GDP in 2008 to 135% by 2011 – something that very dearly to Japan, indeed. In another word, Greece is testing the limit of sovereign debt as it grinds towards slump.

On top, Greece’s current account deficit hit 14.5% of GDP in 2008. In short, Greece is skating on thin ice.

On the other hand, its compatriot the United States is financing its more than trillion dollar a year borrowing with i.o.u’s on terms that seem too good to be true. That happy situation, aided by ultra low interest rates may not last much longer. Treasury officials now face a trifecta of headaches – a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead and interest rates that are sure to climb back to normal as soon as the Fed decides that the emergency has passed. Treasury officials are rushing to lock in today’s low rates by exchanging short term borrowings for long term bonds. The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the US after decades of living beyond its means.

Americans now have to climb out of two deep holes as debt-loaded consumers, whose personal wealth sank along with housing and stock prices and as taxpayers, whose government debt has almost double in the last two years alone, just as costs tied to benefits from retiring baby boomers are set to explode.

The government of these two countries are on teaser rates as clever debt management strategy will not be a better match for prudent fiscal policy!