MARGARET WARNER: And for more on this and what it could mean for the U.S. and the global economy, we turn to Fred Bergsten, a former Treasury official. He is now the director of the Peterson Institute for International Economics.
And, Mr. Bergsten, welcome back to the program.
The markets had been demanding a rescue package for Greece. Finally, it happens, and the markets slide. Why?
FRED BERGSTEN, director, Peter G. Peterson Institute for International Economics: There is a widespread fear in the markets and elsewhere that it may be too little and too late.
Big as this package is, it may not be enough to rescue Greece from ultimately having to restructure its debt, which means forcing some of its creditors to take a haircut, take some losses, write off some of the debt, so Greece can start again.
MARGARET WARNER: So, are you saying that, given the nature of the Greek economy, with its bloated public sector, its tax evasion, that there is reason to doubt whether it could live up to the terms of the agreement as it’s — the sort of massive loan bailout, as it’s currently constructed?
FRED BERGSTEN: Well, there are two things.
One, can it live up to the agreement? The second is, even if they do, is the agreement big enough? There are some doubts about their living up to it. Greeks have been living way beyond their means. They can retire at age 55 on 100 percent of what they were making.
Only a few thousand Greeks with incomes of over $100,000 even pay taxes. There is endemic tax evasion. The prime minister himself has said, we have systematic corruption in the country.
But again, even if they follow through — and all the political parties seem ready to do it, despite the strikes and the people in the streets — the question is, will it be big enough? The Greek debt is now over 120 percent of its economy. It’s headed toward 140 or 150 percent, under the best of circumstances, even if the program works.
When you figure 7 or 8 percent annual interest on that, it’s very hard to imagine reducing the rest of the budget enough to make them able to pay, without some significant restructuring.
MARGARET WARNER: And, of course, restructuring — a lot of the debt is owed to French and German banks, which wouldn’t go over too well there.
Let me move on to the other factor we kept hearing about today, contagion, the fear that now that at least a package of this has been put together for Greece, the traders and speculators are going to start putting pressure on a couple of other debt-heavy countries in Europe, specifically, Spain and Portugal.
What do you think are the dangers of that?
FRED BERGSTEN: I think that’s less a problem, at least for now.
The economic fundamentals in both Portugal and Spain are not nearly as bad. Moreover, the European Central Bank has taken a big step. It’s been willing to now buy Greek financial paper, pretty much like the Fed bought mortgage-backed securities here in the United States, essentially taking care of any liquidity problem that the countries might have.
With that done for Greece, it clearly would be done for Portugal and Spain as well. I think that avoids the risk of any significant spillover, at least for now.
MARGARET WARNER: So, what about the impact on the U.S. of this Greek bailout? To what degree does the success or failure of this Greek bailout have an effect on our economy?
FRED BERGSTEN: Well, it has two or three effects.
Greece is too small, as a share of the European economy — only about 2 percent — to have much effect via growth. Europe’s growth is already modest, but this won’t make it much worse. I don’t think that will hurt us in any significant way.
On the other hand, as your report said, the Greek crisis has led to a sharp weakening of the exchange rate of the euro. It’s off over 10 percent just over the last six months. That means the dollar is stronger. That hurts our competitive position. It hurts our exports, just when President Obama has stressed the need to expand U.S. exports to get our economy growing and job growth up here. So, that hurts.
The other thing is that the Greek fiscal crisis — and this is really a budget crisis, like Latin America in the 1980s, kind of a classic budget crisis — I’m afraid it may start reminding markets that the U.S., too, has big deficits and big — big debt.
On any reasonable projection of the U.S. outlook, our numbers in 10 to 15 years will look about as bad as Greece’s do today. That’s a big warning sign for us. We have got time to get our house in order. There is plenty of time to do it. We have got a much stronger underlying economy.
But, if markets start focusing on those variables, it could be very severe for our own credit ratings, our own market outlook. And the fairly easy situation we have now in funding our debt and deficits could go the other way, and that could be a big problem for the United States.
MARGARET WARNER: So, despite the fact that we, unlike Greece, can print our own currency, still a cautionary tale.
FRED BERGSTEN: That is…
MARGARET WARNER: Fred Bergsten, thank you so much.
FRED BERGSTEN: Good to talk.