Greek debt

For most of the past decade, Greece has run up budget deficits well beyond limits set by the European Union, a group of 27 nations which allow goods and workers to cross their borders freely. When Greece fell into recession two years ago, bondholders became worried they would not get their money back. To make sure they do, the EU is lending money to Greece, essentially allowing it to use new debt to pay off old debt. Greece looks like a bad bet. Its publicly held debt is more than 140 percent of its gross domestic product. The current U.S. debt is 67 percent of gross domestic product.

Greece is a tiny player in Europe. It has a $305 billion economy, about the size of Maryland’s. This is 2 percent of the whole EU’s economy. If Greece does default, it will have plenty of company. In the past 30 years, 20 European and Latin American countries have stiffed their creditors. Some have done so repeatedly. This list includes Turkey in 1982, Mexico in 1994, Russia in 1998 and Argentina in 2001.

Most importantly: If Greece defaults, investors will worry that two much larger EU members, Italy and Spain, might follow. For the United States, an impending European recession would come at an especially bad time. Europe buys about 20 percent of U.S. exports. And exports have been a big driver of U.S. economic growth recently. The United States cannot afford a downturn in such a crucial market. "It’s not just a country floating out there that happens to default,” says Steve H. Hanke, an economist at Johns Hopkins University. "The whole monetary union gets thrown into doubt.”

Ted Rudow III

Palo Alto