Does U.S. Have A 'Greece Problem'?

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Could the Greek debt crisis repeat itself in the United States? It is a question that has drawn plenty of attention in recent days and deserves to be considered seriously, given some disturbing similarities between the U.S. and Greece.

For starters, both nations have double-digit budget deficits as a percentage of national output: the U.S. around 10 per cent and Greece approaching 14 per cent. Both have a large stockpile of debt, although Greece's debt, at 115 per cent of gross domestic product, is considerably larger.

Both nations also running a current account deficit and a low national savings rate. That means both countries are net borrowers from the rest of the world and their spending is being largely funded by foreign money.

But there the similarities end.

True, the United States ran a mammoth current account deficit of nearly 420 billion dollars last year and the International Monetary Fund forecasts this deficit to build up and breach the 600-billion mark by 2015. That's a pretty big number but a 600 billion dollar deficit would represent around 3.5 per cent of America's one-year national output.

In comparison, Greece ran a current account deficit of more than 11 per cent of gross domestic product last year - comfortably the highest among the world's advanced economies.

More importantly, the U.S. recession - painful as it was - is over. The U.S. federal government has now got in its hands a credible plan to consolidate the economy and can now look forward to a period of gradual economic growth and job creation.

Greece, on the other hand, does not have that luxury. The country is still trapped in the midst of a bitter recession, with an exit nowhere near in sight. Add to that the strict austerity program it now has to go through, and a return to prosperity seems far, far away.

Put simply, the United States could let its growth do the work in bringing down its substantial budget deficit - Greece can't. Instead, Athens has to rely on draconian spending cuts and higher taxation to beef up its coffers in the coming years - a daunting task which may not sit too well with the common worker (as deadly riots in the streets of the capital have so painfully illustrated).

In any case, if worse comes to worst and the U.S. recovery somehow loses its footing, the federal government still has its currency to fall back on. The government could just devalue the dollar, by say 20 per cent, and export its way back to growth. Its also a fact that the United States technically cannot default on its debt unless it politically wills itself to do so - the Federal Reserve could just print the dollars to meet its debt obligations (although this would have damaging consequences for the currency).

Greece does not have this option as it cannot devalue its currency independent of the eurozone - it has to earn or borrow everything it spends. Although its highly debatable whether an exit from the euro would benefit Greece in the long run, it nevertheless does not have a choice, as a break-up of the euro area is still considered unthinkable.

The above factor also makes a straight comparison between the United States and Greece a little unfair. A better comparison would be the U.S. versus the entire eurozone. But here too, many of the Club Med countries face the same problems as Greece, i.e. low growth, steep budget cuts, and no currency control.

The euro area has a common currency, a common central bank, but no central government. Its one-size-fits-all currency, without fiscal coherence between individual member states, has cost it dearly, and for all its talk of prosperity through unity, the eurozone remains a politically divided region.

So, in short, the United States is a long way away from the kind of crisis raging through Greece, or indeed the eurozone. Although its public deficit is as high as the euro area, its economic and fiscal outlook look much more brighter.

But that isn't to say that the U.S. is completely free of risk from the eurozone crisis or that it could never face a similar crisis in its own shores.

Quite possibly, the European debt crisis could end up scaring away investors from buying the public debt of the more stable economies. Although investors have flocked to U.S. Treasury bonds as a safe haven since the debt crisis unfurled in Europe, a crisis of confidence in general government debt could yet break out. If investors perceived a greater risk in holding U.S. government debt, they would demand higher interest rates on their loans. The result would be higher rates and consequently, slower economic growth.

A setback to European economic growth will have a cascading effect, as it would mean lesser export demand for goods and services consumed by Europe. In response, the resurgent factory output in the U.S. may have to be slowed down, resulting in lower production. This would curb raw material usage, which has the capability of exerting further pressure on commodity prices.

Every cloud has a silver lining. True to this maxim, even this development has a positive impact. The slide in oil prices, in particular, has the potential to free up income spend on gas either for spending or for saving depending on the disposition of consumers. An average resident of the U.S. spends between 3% and 10% of his income on gas depending on the state he is residing in.

At the same time, the firming trend of the U.S. dollar does not bode well for nation's exports. Additionally, a stronger dollar will furthermore reduce the dollar value of factor income from U.S.-owned subsidiaries in not only the euro area, but in most other countries as well.

When all is said and done, there is no denying of the fact that the United States faces enormous challenges in the next few years - fiscal and economic. While it is vastly better equipped to deal with a potential debt crisis than Greece, the threat of contagion spreading from Europe cannot yet be ruled out and there can be no room for complacency. Given the rate its public debt is climbing, the federal government's clarity and resolve in bringing down its borrowing will be crucial in how it fares in international markets in the coming years.

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