The New Cradle of Debt-ocracy

Posted: May 09, 2011 12:01 AM
The New Cradle of Debt-ocracy

Rating agencies have downgraded Greek debt again with some investors believing that a default is likely by the country known as the Cradle of Democracy.

But the downgrade should be regarded, more than anything, as an admission of guilt by the rating agencies.

As Congress starts to wrangle with the debt ceiling issue, they might be well advised to regard Greece as the Cradle of Debt-ocracy, with the U.S. as its favored son.

“S&P, which downgraded the long-term bonds to B from BB-, said Greece might eventually have to resort to a partial default,” reports the Associated Press, “reneging on as much as 50 percent of its debt. As a result, the agency said it could downgrade Greece again in coming months.”

Missed in the story is that, for all intents and purposes, Greece has already declared a de facto bankruptcy.

In order to avoid default on current loans, the EU has been forced to make more loans to Greece. The terms of those loans will have to be renegotiated, it is now clear.

Either the payment terms will have to change or principal amounts will have to be forgiven.

If that’s not bankruptcy by another name, I don’t know what is

The rating agencies are only reacting to news rather serving as a clearinghouse for data useful to investors and institutions.

The rating agencies chronic math problems have, for decades, failed to find issues prior to problems becoming problems

Want a list?

They missed problems in the junk bond market, Latin America, oil and gas in the 80s, the savings and loan industry, biotech, IPOs, emerging markets, Asian currencies, the dotcoms, the derivatives market, domestic automobiles and sub prime mortgages over the last forty years.  

I mean, where do you think Wall Street got its fancy calculations that gave us the real estate bubble? They relied to a great degree on numbers supplied by the rating agencies.

That’s why news that the rating agencies downgraded U.S. debt should be considered even more alarming.

The debt situation in the United States government finds itself in compares favorably to the Grecian debt fiasco. Except that it’s worse for the U.S. debt outlook.   

The only things the U.S. has going for it are that it has a HUGE economy compared to the Greeks, and so it has a lot of potential for growth.

And we have a sterling reputation still, because we still have the best credit markets in the world.

After those two strengths are discounted though, the comparison becomes much starker.

There are several numbers that are sounding the alarm claxon:

  • The Federal deficit as percentage of spending is 42 percent in the U.S. versus 27 percent in Greece.

  • The total government debt as percentage of GDP in the U.S. is 94 percent. In Greece it’s 115 percent.  
  • Interest payments as a percentage of spending 10.2 percent here versus 9.9 percent in Greece.   

If those numbers don’t lay out they case for why we must reign in spending before even considering an increase in the debt ceiling, this one might. The numbers used in the comparison above don’t take into account the off-the-books liabilities like mortgage guarantees, social security liabilities and student loans. When you reckon in those, the total debt of the government might be as high as 500 percent of GDP according to at least one well-known money manager.

While it’s true to say that we spend too much, the whole truth is that we spend too much that we don’t have.

The only question is when the day of reckoning will come.

Since 2009, we’ve witnessed an extraordinary outpouring of grassroots anger and activism mostly about fiscal matters.

The GOP was swept back in to power after mucking up its brand as the party of personal and fiscal responsibility. They won on the enthusiasm of these activists who demanded that the party, and the country, return to its roots and fiscal sanity.

If we ignore their warnings now, the day of reckoning will come sooner rather than later.

And the reckoning will start with the GOP.

Complete numbers comparing Greece and the U.S. debt outlook.  

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