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Economics of Greek, Italian, and U.S. Sovereign Debt Defaults
Raymond Richman, 11/14/2011

The Greek government’s expected default on its bonds has had an enormous effect on the volatility of securities markets worldwide far beyond what should be expected from an anticipated default by a country of less than eleven million people with a GDP of only $300 billion. Italy is a different matter. Italy is a country of 61 million people and a GDP in 2010 of $2.1 trillion. Both suffer chronic budget and trade deficits that have made servicing their bonds increasingly difficult and both face the likelihood of default. The same is true of Portugal and Spain.

U.S. trade with Portugal, Greece, Italy and Spain was and continues to be relatively insignificant, although the U.S. did account for 5.8 percent of Italy’s exports in 2010. European banks hold billions of the sovereign debt of the above four countries. The write down of their debt has already caused the bankruptcy of a  large French-Belgian bank, Dexia. U.S. banks hold insignificant amount of their debt and the U.S. economy is unlikely to experience anything resembling a crisis as a result of defaults in Europe.

The world has experienced dozens of defaults on sovereign debt during the past century:

  • Mexico, a country of 114 million defaulted in 1982. The IMF and the U.S.Secretary of the Treasury made their services available and foreign owners of Mexican bonds settled for a fraction of the initial value of their holdings.
  • Brazil, a large country with a population of about 203 million defaulted on its foreign-owned bonds in 1986-87, without causing much of a reaction in world markets and its creditors settled just as Mexico had.
  • Argentina’s currency in the 1990s was fixed in terms of U.S. dollars. But just as Greece's euro reserves dwindled, Argentina’s dollar reserves dwindled, and in 2000, the country abandoned its peg to the dollar, defaulted on its foreign debt from 2002-2005, and to our knowledge made no settlement with creditors.

None of these dafaults had enduring effects on the U.S. stock markets. Of course, private investors in the bonds of defaulting countries suffered great losses but markets generally were barely affected.   

In these cases and in the case of large counties like Indonesia, 1999, population 245 million, and Pakistan 1999, population 187 million, some world-wide concern was apparent.  But the principal determinant of the behavior of stock markets in the U.S., Europe and elsewhere was and continues to be the expectations of investors of the future profits of their own listed corporations. Given the many reports of satisfactory and good earnings of so many corporations in the U.S., another collapse of the U.S. stock markets is unlikely, at least in the short-term.

Why, then, has the anticipated default of Greece, caused such concern in world markets?  What is unique is the expectation of contagion with Italy, Spain and Portugal following suit and the possible break-up of the eurozone.  This is a serious problem for the European Union, not for us. It is also a serious problem for European banks which hold huge amounts of their debts.

Fortunately, the holdings of U.S. banks are relatively very small. Why U.S. investors are so concerned as the response from every bit of news from the eurozone testifies cannot be explained on the basis of economic rationality. Perhaps it is the result of the news media which believe that terrorizing investors attracts an audience and a large audience sells advertising. To us, the volatile reactions to the news from the European Union are totally unjustified by the possible economic consequences. Even our trade with them is nearly insignificant.  Their leading trading partners are their fellow members in the eurozone and OPEC.

Why do so many in the media spread a fear of contagion if Greece and other eurozone countries default on their bonds? Because they believe that the U.S. faces a similar fate. Fortunately for the U.S., its debt is payable in dollars. So the worst that can happen is that the U.S. monetary authorities will be forced to print trillions of dollars which will have the effect of causing hyperinflation a la Germany and Brazil.

Their debt is expressed in a euro standard, a money that they lack effective control over. Germany expects them to pursue austere economic measures that will lower wages and prices. If we do not change our economic policies, we face ruin through hyper-inflation and continued deindustrialization. Within a matter of a few decades, we can become a second-rate political and economic power.      

This week, Italy is “in crisis” with its premier Berlusconi resigning after receiving less than fifty percent of the votes in the parliament, a weak vote of confidence. Italy is much larger than Greece and the U.S. stock markets tumbled on the news. It is the people of the four European countries who will have to reduce their living standards as a result of the austerity measures prescribed by the economists of the EU. It may be that they probably deserve it because they exchanged their birthrights of free markets for government promises and foolish social and economic theories like entitlements and man-made global warming (AGW). Greece, Italy, Spain, Portugal, and the U.S. have been experiencing huge budget deficits financed by borrowed money from abroad to finance social “benefits” and environmental projects all of which were very costly and required subsidies and none of which contributed to revenues, employment, or productivity.

And yet we continue to waste enormous resources on a fruitless attempt to prevent global warming, to hamstring our most productive fossil fuel industries, to house low-income families in high cost housing, to try to provide unlimited medical care free to everyone, to take no action to reduce our enormous trade deficits, to increase federal spending on everything, to pay government employees much more than they could earn in the private sector. The U.S. is facing disaster in the not too distant future unless we correct our foolish economic policies. 


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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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