Today, the Greek government is voting on an austerity package that will enable it to receive another round of funding from the European Central Bank and the International Monetary fund. Yes, it is an ocean away, but this vote has the potential to affect the economy and your pocketbook right here in the U.S. as well as the world.
The Greeks need funding because they are heavily indebted to the tune of 340 billion euros ($476 billion) and have no ready means to repay or borrow more from regular sources, given the high interest rates for loans to the country.
Greece entered this gloomy predicament through years of government overspending on their bloated public sector and fudging of their numbers.
Normally, a country in Greece’s situation could devalue their currency, but Greece is stuck in the Eurozone, where they do not control their currency.
So, as all eyes are on Greece today, what might the ripple effects of a “No” vote be? A No vote would mean that Greece would surely default on their debt repayments and may be forced out of the Eurozone. Other highly indebted EU countries like Portugal, Ireland, Spain and Italy would also face huge increases in the costs of borrowing.
There is therefore the chance that a Greek default could lead to a European recession which could spread to a worldwide recession as private credit dries up. This is what the Europeans and now, the Chinese and the US are desperately trying to avoid.
A new recession will lead to a drying up of jobs here in the U.S. as firms hoard cash even more. Fragile property prices, which are showing a few signs of life today, may continue their downward spiral and few would be spared from the contagion effect.
Progress however, is now being reported in talks to persuade European banks and insurers to voluntarily roll over maturing Greek debt as part of the planned second rescue package designed to give the country some breathing space.
However, even if Greece survives this latest crisis, with a shrinking economy and social chaos, many analysts still feel that a credit default may just be a matter of time.
There is a moral of this story for the United States. It is that you cannot run deficits forever. They will come back to haunt you sooner or later. Thus, with its own ballooning deficits, it is well past time for the U.S to get its own economic house in order – before it is too late.