By: Dr. Mike Campbell
Greece has plunged the Eurozone into a crisis which is sending shock waves around the world due to the inter-connectivity of the business world. The Greek sovereign debt crisis has been triggered by a debt of €310 billion – Italy, the next performer to take to the stage in Europe, has debts in excess of €1 trillion. However, this pales into insignificance against the debts of the USA which stand at about the $15 trillion mark.
The problem, as far as debt goes, is confidence. Greece, Ireland and Portugal were forced to accept IMF/EU bailout facilities (with austerity strings attached) when the money markets lost confidence in their abilities to honour their obligations and so, perversely, pushed up their borrowing costs to unsustainable levels. Spanish and Italian bonds are flirting with those same levels now, so unless confidence can be restored to the markets, the dark clouds on the horizon will unleash another downpour of woe on the beleaguered Euro.
US On Shaky Ground Too
Ratings agency Fitch has changed its outlook for US credit from stable to negative. At the moment, the nation’s AAA rating has not been altered, but they have made it clear that unless credible moves are taken to tackle the US debt mountain, a downgrade will follow. The move comes, despite rays of good news on the US economic front, on the back of the failure of a bi-partisan committee to agree measures to reduce US debt.
The failure was a political inevitability given that 2012 will be an election year – neither Republican nor Democrat was prepared to be seen to be giving ground (in the national interest) and risk alienating their electoral base at such a time. US politicians seem not to have learned from the European colleagues that decisive measures are needed, now, to prevent what confidence remains in the system from dissipating. The US is the world’s largest economy, but how well could it withstand 7% interest on its borrowing to service a $15 trillion total debt burden?