Greece introduced the world to drama. And the country has taken center stage in the euro zone sovereign debt drama yet again.
Last year’s Greek bail-out was evidently insufficient…next month European Union officials meet to decide on another rescue plan. And last week Standard & Poor’s cut the country’s debt rating to CCC… making it the developed world’s lowest rated sovereign debt. Beyond that, the European Commission expects the country’s debt burden to amount to almost 160% of GDP this year.
Given that, the question becomes: is the U.S. worse off?
It’s certainly not better off. The Treasury Department will run out of money on August 2nd. And if the $14.3 trillion debt ceiling is not raised by then, the U.S. will be unable to meet its obligations, effectively defaulting.
But that’s not the worst of it, according to Bill Gross. The PIMCO fund manager believes that, rather than focusing on the government’s imposed ceiling, we should consider the money owed for future liabilities. Factoring in future entitlement program obligations, the U.S. is on the line for something like $100 trillion (according to Gross).
And the country could be on the line for another financial crisis if the debt ceiling is not raised, according to President Obama: “The full faith and credit of the United States is…the underpinning of a global financial system. We could actually have a reprise of the financial crisis…”.
And Fed Chairman Ben Bernanke warned that “even a short suspension…on the Treasury’s debt obligations could cause severe disruptions”.
In spite of those realities, the bond market is not worried about “severe disruptions”. Rather than steering clear of U.S. government debt, investors have driven Treasuries up (short, intermediate and long-term maturities).
That bond investors are piling into Treasuries is understandable (though there more reasons to avoid them). After all, the markets consider the probability of a U.S. sovereign debt default to be virtually zero (and depending who you ask, some would say Greece has a 90% chance of default). And unlike Greece, the U.S. can continue to monetize the debt (print money).
The bottom line: is the U.S. better off, the same, worse? It’s immaterial to me. If Greece’s debt situation is a catastrophe, the U.S. debt situation is a disaster. And I wouldn’t lend money to either.