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Why Americans Should Care About the Debt Crisis in Greece

Posted Jan 21, 2010 10:52am EST by Peter Gorenstein

Is Greece about to go bust? The Greek government says they don't need a rescue package but they are exploring all options to claw out of a mounting debt crisis to cover their near-term budget shortfall.

Investors are still skeptical. Yields on Greece's benchmark 10-year bond are trading near record premiums to comparable German debt after briefly touching a record high on Wednesday. The cost of insuring that debt through credit default swaps is also near unprecedented levels.

European Union officials say they are not worried about Greece defaulting and have refused to discuss talks of a bailout.

Jim Bianco, president of Bianco Research in Chicago, isn't so sure about either outcome. If Greece does default, "this could lead to a cascading effect" among other financially vulnerable nations, he warns. And, if Greece were to get bailed out that would be bad news for the rest of the Eurozone. Not only would the Euro decline, it would create a moral hazard.

Why should Americans care?

It's simple.

"If developed countries stop paying...then we've got a whole new world" resulting in higher borrowing costs around the globe, Bianco says, drawing a distinction between Greece and emerging markets like Argentina and Russia that have defaulted in recent years. A default by Greece, or other debt-laden Eurozone nations, speaks to an even larger concern, he says: "The fear in the marketplace is there could be a limit to the amount of money that governments can borrow and we might be close to that limit everywhere."

That would surely be ominous for the United States where debt is the country's biggest export.