The unfolding sovereign debt crisis in the eurozone’s periphery threatens not only the stability of the international financial system but could also infect the U.S. economy. This debt could hamper our country’s fragile recovery that shows signs the job market is improving.
Following years of bloated government spending and unrestrained growth in generous government entitlement programs, the eurozone’s sovereign debt problems in Greece, Ireland and Portugal continue to worsen. Indeed, for these countries some form of debt restructuring seems to be the only way forward.
The deteriorating conditions of the eurozone’s debt crisis is a threat to the recovery of the American economy as the fiscal and financing problems they face continue to escalate and show no signs of improvement. For example:
● Current debt levels in some eurozone countries have reached unsustainable levels.
● Unlike the U.S., individual eurozone members can’t print money and export their debt.
● GDP growth that cannot keep pace with expanding debt and deficits.
● The austerity measures required to reduce government spending have proven to be difficult, if not impossible, to implement.
● Emergency funds provided by the European Union via “bridge loans” provide only temporary relief that fails to address the root cause of the problem: unsustainable levels of debt.
More than a year after the European debt crisis erupted in Greece, the debt crisis has gotten worse. Ireland has required a “bailout” and Portugal, with its expanding deficit, seems a foregone conclusion.
Contrary to the European Central Bank, financial market data shows Greece, Ireland and Portugal will face strong economic headwinds making debt restructuring a matter of “when” not “if.” Spain and Italy seem to have received a market reprieve.
As noted recently in The Economist, the growth prospects for Greece and Ireland, the eurozone’s two rescued countries, are not encouraging and their economies “are shrinking faster than expected.”
This concern is reflected in the 10-year bond yield which peaked above 13 percent for Greece and over 10 percent for Ireland. Portugal’s fiscal health is not any better with 10-year bond yields topping 8.5 percent.
Higher yields on government bonds reflect investors’ fears that the country is more likely to default.
Given the dire financial conditions of the Greek, Irish and Portuguese economies, the reality is that their only salvation at this point is debt restructuring. Today, their debt levels are not sustainable and their economies lack the capacity to meet their current and future debt service payment obligations.
A “multi-year” debt restructuring plan similar to the one implemented in Latin America in the 1980s is a viable option.
On the domestic front, the exposure of U.S. banks to this debt poses a threat to the stability of the financial system and has the potential to slow down the growth of our economy.
Besides undermining economic growth in Europe, the deteriorating conditions of the debt crisis in the eurozone also mean less growth for the global economy and the U.S. economy which accounts for over 25 percent of global gross domestic product.
Although “bailout” funds can provide the interim assistance a nation needs to help meet its financial obligations during a major crisis, “emergency funds” are not the solution to the debt crisis the eurozone faces today.
As events following the Greek crisis have shown, the extra infusion of “debt” can do more harm than good by allowing countries with unsustainable levels of debt to kick the can down the road and postpone the inevitable restructuring of their debt obligations. In addition, given the precarious state of the eurozone economies, this can only mean a major recapitalization of core European banks and the financial shock waves that could hamper the recovery of the U.S. economy.
The sovereign debt time bombs in Greece, Ireland and Portugal should serve as a reminder that governments, just like individuals, cannot solve their debt problems with more debt.
Edgar Ortiz is director of Strategic Planning at West Mountain LLC and CEO of Strategic Analytic Solutions LLC, a management consulting group based in Atlanta.
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