Blog | Personal Finance

Studying Greece

A couple weeks ago, I wrote a post on this blog about the Standard & Poor’s negative outlook on the US debt (“Downgraded”). In that post I stated:

In the coming months, the ability or inability of the US government to get the financial house in order will determine the fate of many people's fortunes. If the US credit rating is downgraded from AAA, the result will be catastrophic for the economy. Most likely, stocks, bonds, and mutual funds would tumble; and commodities like gold and silver would skyrocket. Additionally, borrowing costs for both the US and the US consumer would climb sharply, causing another housing crisis.

Today, Greece, the European Union nation at the center of last year’s European debt crisis, received some bad news: the S&P downgraded their credit rating from double B minus to single B, making their rating worse than many developing nations.

This sparked a sell-off of bonds across a number of European countries and drove the Euro down to its lowest level in nearly a month. That’s the power of a credit downgrade.

The reason S&P downgraded Greece is because there are rumors swirling that Greece will seek to delay debt payments to bond holders and possibly restructure their debt. When you or I do something like that, it’s called bankruptcy. And now even Moody’s is considering downgrading Greece as well.

Fears are now rekindling that the European debt crisis is far from over, putting investors on their heels and running for the hills. Fear and uncertainty is taking hold yet again.

I suggest you study your Greek and pay attention to Greece because what’s unfolding in Europe is only a foreshadow of what could happen in the US. If the downgrade of Greece’s already poor credit rating is causing so much trouble, imagine what will happen if the most powerful economy in the world—the US—is downgraded.

Nobody would be worrying about the European debt crisis anymore.

As I suggested a few weeks ago, unless the US gets its financial house in order, an S&P cut will be inevitable. And things aren’t looking good. According to Reuters, the US will reach its debt limit in less than a week and an increase of $2 trillion over the existing $14.3 trillion debt ceiling will be needed to keep the US afloat through the end of the year.

This is causing renewed fighting between Democrats and Republicans as to how to fund the increase. The Democrats are calling for tax hikes. The Republicans, led by Rep. John Boehner are calling for cuts to match the hike. As Reuters reports:

With less than a week until the United States runs up against its $14.3 trillion debt limit, the finance industry is counting on Congress to sign off on a further increase to avoid an unprecedented default that would roil markets across the globe.

But any increase will have to include unprecedented spending cuts, House of Representatives Speaker John Boehner told top industry executives.

"We're not talking about billions here, we should be talking about cuts in trillions if we're serious about addressing America's fiscal problems," Boehner said in a speech at the Economic Club of New York.

Needless to say, this will be an interesting week. Keep your eye on Greece. Keep your eye on the US. And even more importantly, keep your eye on your money.