How Close Is the U.S. to Becoming Another Greece?

Includes: AGG, DIA, SPY, UDN, UUP
by: Market Blog

By David Berman

FT Alphaville has an interesting post addressing the question of whether the United States could soon be in the same trouble as Greece. The two countries certainly have something in common: massive budget deficits. However, the similarities – while alarming – probably end there. Here’s a quote from a Merrill Lynch economist that should soothe some nerves:

“While Greece matters, attempts to extrapolate its debt crisis into a sovereign crisis for the U.S. seem far fetched to us, to say the least. Credit Default Swap Spreads for the U.S. have widened, as in most countries, but remain far removed from crisis levels. If we were to reach a point where the U.S. was having trouble financing its debt, the world would be in a dire spot indeed. A replay of the last year would be likely, where the U.S. caused a global capital markets crisis, triggering a risk aversion trade, strengthening the dollar and lowering U.S. borrowing costs. It’s good to be the king of currencies.”

The Merrill Lynch economist doesn’t rule out a problem completely, at least longer term. The U.S. budget deficit could rise even higher as the baby boom generation retires and rising costs of Medicare outstrip rising economic growth. But at least the United States has room to make substantial adjustments to its operating budget. As the Merrill Lynch economists calculates:

“With shared sacrifice a solution exists. Winning the war on terror and lowering defense spending from 4.9% to 3.0% of GDP would shave the deficit by 1.9 percentage points. Raising taxes to pre-Bush levels would slice about 3 percentage points off of the deficit. And constraining Medicare growth to match the growth in general inflation and in the retired population would yield additional savings.”