A US Debt Crisis in the Making?

US government building


The Greek sovereign debt crisis has dragged the global economy to the brink of a much-feared ‘double dip’. But, is it merely a precursor to a similar crisis unfolding in America?

What unfolded in Greece follows a pretty simple dynamic: high deficits and a soft economy drove bond prices and yields to a level that made the possibility of a default on government debt very real. The fact that Greece, as a member of the euro zone, did not have a national currency to devalue and thereby open the way for a ‘backdoor default’ further complicated matters.

High levels of deficit spending and uncertainty over future sources of finance are leading many to project a similar course for Washington. A cursory glance at the numbers seems to corroborate such fears. The current US debt-to-GDP ratio stands at 90 percent- not too far off of Greece’s 115 percent.  This figure also stands to grow quickly, as the current budget deficit stands at a staggering $1.4 trillion USD, or 9.9% of GDP.

All told, the current fiscal health of the United States government makes a situation similar to Greece not too difficult to imagine. Moody’s Investors Services recently revealed that they have projected that the United States could be downgraded to an ‘AA’ credit rating as early as 2013. To earn such a downgrade, Washington would need to be paying over 20 percent of its’ federal budget towards servicing public debt.

While the American economy is bigger, stronger, and has far better fundamentals than that of Greece, it also carries substantial burdens in the form of global responsibilities and the ‘unfunded liabilities’ of Medicare and Social Security. By 2015, the CBO projects that Medicare will cost $735 billion per annum, a figure that is expected to skyrocket to over $1 trillion by 2020.  This commitment combined with the over $700 billion of yearly defense spending paints a bleak picture for the US budget moving forward.

A sizeable deficit is just one component that could contribute to a sovereign debt crisis in the United States, and another is available sources of finance with which to continue deficit spending. This finance can come from foreign or domestic sources. On the domestic front, the American household savings rate has notched up since the 2008 global financial crisis, but not nearly enough to absorb the amount of debt that’s required. On the other hand, major foreign buyers of US Treasuries such as China have been incrementally reducing their exposure to US dollars over the past couple years. In 2009, Beijing accounted for a mere 5 percent of new Treasury purchases.

All of these factors seem to point to a day in the future when the US government will find itself unable to raise the money needed to pay for its’ commitments, triggering a spiral of rising bond prices and yields similar to that witnessed in Greece. Morgan Stanley is already projecting that 10-year yields will raise from 3.5 percent to 5.5 percent this year alone.

Whether the US sovereign debt crisis is as explosive as the one witnessed in Greece remains to be seen, there is however one certainty moving forward: in some shape or form, it’s coming.

SUMMARY OF EVENTS: May 3rd – May 10th, 2010


United States

The US has evidence the Pakistan Taliban was behind the attempted car bombing in New York’s Times Square, Attorney General Eric Holder says.

U.S. stocks tumbled the most in a year as waves of computerized trading exacerbated a selloff triggered by Europe’s debt crisis, sparking a slide in Asian shares.

FBI agents pulled a Pakistani-American suspected of the botched New York car bombing off a plane in a dramatic arrest as he tried to flee the country, officials said on Tuesday.

The United States has officially announced the size of its nuclear arsenal, saying it now possesses 5,113 operational nuclear weapons.

US President Barack Obama on Sunday warned of a “massive and potentially unprecedented environmental disaster” and said his administration has mounted a “relentless response” to the oil spill unleashed by the sinking of an offshore drill rig in the Gulf of Mexico.


Mexico’s bloody drug wars saw a new spasm of killings late Saturday into Sunday, with 25 people fatally shot in the northern state of Chihuahua bordering the United States.


EU finance ministers have met in Brussels to discuss establishing a new “stabilisation mechanism” to prevent the Greek debt crisis from spreading.

The head of NATO Wednesday put the cost of linking up the alliance’s missile defense systems at less than 200 million euros ($260 million), and said it was a small price to pay to protect citizens.

The European Union is concerned by nuclear programs of Iran and North Korea, the EU high representative for foreign affairs and security policy said.


Tens of thousands of Greek citizens marched in the center of Athens on Thursday afternoon, encircling the parliament building, while inside the bill on the new austerity measures was approved.

The unprecedented 110 billion euro bailout package cannot prevent Greece from defaulting on its debt and the euro may fall below $1.25 in a matter of weeks, a senior economist at Mesirow Financial said.

Demonstrators stormed the Acropolis in Athens on Tuesday ahead of a general strike against austerity cuts, as the euro plunged and stock markets tumbled on fears that the Greek debt crisis could spread.



Troops from four Nato countries have marched for the first time in Russia’s annual parade to mark victory in WWII.


Belarusian President Alexander Lukashenko says he will not extradite deposed Kyrgyz President Kurmanbek Bakiyev to his native Central Asian country to stand trial.



A senior Iranian energy official has announced that Iran’s natural gas exports have doubled since the beginning of the current Iranian year (March 21).


Syria on Saturday warned Washington not to accept Israeli allegations it had sent long-range Scud missiles to Hezbollah, saying an Israel armed with the latest U.S. arsenal was itself a threat to stability.



Afghan President Hamid Karzai left for Washington Sunday on a four-day visit, his office said, aiming to mend ties after a damaging row over his criticism of foreign partners.

Canadian captive Omar Khadr was hooded, crying and chained to a door outside his cell in Afghanistan around the time he turned 16, a former U.S. medic testified on Monday in the Guantanamo war crimes tribunal.

President Barack Obama’s request in February for more money to pay for the war in Afghanistan is still snarled in Congress as lawmakers work on other priorities and deal with scarce budget resources.


Hopes faded in Thailand on Thursday for a swift end to weeks of anti-government protests after both sides accused each other of insincerity and squabbled over details of a reconciliation plan calling for November polls.

Thailand’s embattled premier Abhisit Vejjajiva said Thursday the lower house of parliament will be dissolved in September, paving the way for November polls in a bid to end a crippling political crisis.



A senior US diplomat said on Sunday the United States was concerned by Burma’s preparations for a long-awaited election but would continue its attempts at deeper engagement with the country’s military rulers.


Angry residents of Okinawa rejected on Tuesday a plan by Japan’s prime minister to keep at least part of a controversial U.S. base on the island, in what could prove a new blow to support ahead of an election.

South Korea

South Korean President Lee Myung-bak said on Tuesday the sinking of a warship in which 46 sailors were killed was no accident but he stopped short of blaming North Korea and made clear he was not about to order a revenge strike.



Nigerian President Umaru Yar’Adua has died, an official at his office confirmed late on Wednesday.


Somali pirates seized control of an oil-laden Russian tanker in the Gulf of Aden early yesterday setting up a high-seas standoff with a Russian destroyer steaming to the zone. The 230m-long Moscow University was heading east from the Gulf of Aden early yesterday when it was boarded by pirates around 350 nautical miles off the Yemeni coast, the EU anti-piracy mission said.

DR Congo

The United Nations is investigating reports that Ugandan Lord’s Resistance Army rebels killed 100 people in February, the latest in a string of massacres in Congo’s remote northeast.

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