NEW YORK (MainStreet) – With many U.S. Consumers wondering if the American economy is slipping back into recession, sobering news comes from overseas – Greece could be flat broke by June. What would that mean to U.S. consumers?
Some U.S. economists have compared Greece to the proverbial “canary in the gold mine” – a looming disaster that should serve as a warning shot across the bow of debt-ridden Western nations, including the U.S.
How bad is the Greek economy? According to country officials, the Greek economy will contract by 5% in 2012, worse than the already alarming 4.5% GDP forecast Greece had reported last March.
The negative GDP number marks the fifth straight year in recession, and this year could mark rock bottom for the country.
A Washington University in St. Louis economics professor says that Greece could actually run out of cash by June, 2012 – if country leaders can’t broker a deal with other Western nations that would produce “substantial reductions” in Greek public debt.
“At that point, a suspension of interest payments will become almost inevitable, pushing Greece out of the Eurozone and back to the drachma,” notes Costas Azariadis, an Edward Mallinckrodt Distinguished Professor in Arts & Sciences at the university, and a native of Greece.
Nothing is etched in stone, but the current options on the table include some “scary scenarios” for Greece, Azariadis says. More clarity is expected now that Greeks went to the polls on May 6, largely voting (by a 70%) margin to stop further budget cuts put in place to curb the country’s deep recession, and to alleviate a jobless rate that stands at 22%.
“Politicians who favored the Northern European model of balanced budgets, labor market reforms and global competitiveness were sent packing,” Azariadis explains. “Many voters, especially those working in the public sector, opted to preserve the European welfare state with a strong safety net, good pensions and free medical care.”
The biggest gainers from the election are fringe parties on the extreme left and extreme right of the political spectrum, he says.
If Greece goes under what would that mean to U.S consumers?
Azariadis doesn’t specifically say, but economists note that a bankrupt Greece would slow down an already fragile U.S. economic recovery, and likely put even more Americans out of work.
If Greece does go broke, that would also hurt the entire European economy, as countries has invested heavily in Greece’s debt alleviation campaign. That would negatively impact U.S. companies doing business in Europe, and likely reduce profits. That could result in even more layoffs, and less money for consumers to spend the lift the U.S. economy.
Additionally, if Greece default on its debts, U.S. banks would feel the pain, too, and indirectly, so would the American consumer. Many U.S. banks are owed money on loans to Greece, both in the public and private sector. With Greece unable to repay those debts, that would hit the bottom lines of U.S. banks, and could lead to those banks tightening credit and offering less loans to U.S. businesses and consumers.
Taken together, a broke Greece would reverberate across global economies, generating less consumer confidence in any economic recovery, in the U.S. and abroad.
Hopefully, Greece can broker a suitable deal with its European allies. If not, as Azariadis says, the country could run out of money, and the repercussions of that event would be felt across the globe.