If a “sovereign debt” crisis in Greece (population 10.7 million) can cause stock prices around the world to fall, what will happen to world markets if there is a similar crisis in the United States (population 307 million)?
The questions is relevant, given Standard & Poor’s decision to lower the U.S. credit rating from the perfect AAA it has held since 1917 to AA+. While some of the recent stock market drop – the worst since 2008 – can be attributed to other factors, such as sovereign debt in Europe and the continuing weak economy, the lower credit rating, has had a significant market impact.
The U.S. isn’t Greece – at least not yet – but it seems to be heading in that direction, in spite of the recent debt ceiling agreement, which cut $2.5 trillion from future spending.
Greece’s debt represents 155% of gross domestic product and is expected to reach 170% next year, according to The Wall Street Journal. In other words, the government is spending $1.55 for every dollar’s worth of goods the country produces.
Meanwhile, the U.S. debt-to-GDP ratio is approaching 100% – even though it excludes an estimated $61.6 trillion in unfunded obligations for Medicare, Medicaid and Social Security. In addition, state and local governments have trillions of dollars in unfunded debt obligations.
In addition to running a $1.5 trillion budget deficit, the U.S. government added $5.3 trillion in financial obligations in 2010 for off-budget items, according to USA Today.
Maybe we’re not so far away from Greece after all.