Is A Debt Crisis Around The Corner For U.S.?

Both the U.S. and Greece have big budget deficits and too much debt, but Greece faces an immediate crisis. Could the U.S. face similar problems in the future?

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An aid package to keep Greece from defaulting on its debt is still being hammered out. It's expected that the Greek government, European Union officials and the International Monetary Fund will complete a rescue plan over the weekend. Many Americans worry about the size of U.S. deficits, and NPR's John Ydstie takes a look at whether the U.S. could suffer a similar crisis.

JOHN YDSTIE: There was lots of sober talk about exploding government debt around Washington this week, and it wasn't just about Greece. President Obama's debt commission held its first meeting on Tuesday. It's supposed to come up with ideas to curb record U.S. deficits and debt. The next day, at a big public symposium, former Treasury Secretary Robert Rubin raised the Greek issue.

Mr. ROBERT RUBIN (Former Treasury Secretary): We are massively different. We are not remotely like the situations in Greece, Portugal and other countries of Europe. But I do think we should try to learn from that, how important it is to make sure that we never face anything even remotely like what they're facing right now.

YDSTIE: But Carmen Reinhart, an economist at the University of Maryland, thinks Americans might be too complacent.

Professor CARMEN REINHART (Director, Center for International Economics, University of Maryland): Countries, time and time again, allow themselves to be positioned in very vulnerable situations because they think the crises are things that happens to others, not to us.

YDSTIE: An U.S. crisis could look a lot like what's threatening Greece, says Reinhart: a refusal by lenders to lend, dramatic cuts in government benefits, and serious damage to our economy.

Prof. REINHART: A Greek scenario is not something that is around the corner for the United States at this stage. However, let it go unchecked.

YDSTIE: And the consequences might surprise you. But former Federal Reserve Vice Chairman Alan Blinder thinks a Greek ending to the U.S. debt drama is unlikely.

Professor ALAN BLINDER (Princeton University; Former Vice Chairman, Federal Reserve): The differences, to me, outweigh the similarities.

YDSTIE: One difference, says Blinder, now a Princeton professor, is that Greece's debt relative to the size of its economy is almost double that of the U.S. That said, the U.S. debt could end up just as high in the future if we don't control our deficits.

But there's one really crucial difference between the U.S. and Greece, says Blinder. The U.S. has its own currency. The Greeks gave up theirs when they adopted the euro.

Prof. BLINDER: If Greece was not part of the eurozone, the drachma, which is what it was called, would have already depreciated substantially. That would be giving a boost to Greek exports and to the Greek economy.

YDSTIE: And when the drachma depreciated, it would have also the reduced the real value of Greek debt. Most of that debt would probably have been denominated in drachmas, so Greece would have paid it back with cheaper money. But Greece can't depreciate the euro, so it can't reduce its debt in that backdoor kind of way.

However, having its own currency doesn't mean the U.S. won't face serious consequences if it doesn't get control of its finances, says Blinder.

Prof. BLINDER: I think we'll pay the piper in two main dimensions. One is considerably higher interest rates than we have now.

YDSTIE: Lenders will see more risk in holding U.S. bonds precisely because the U.S. might decide to allow or even encourage a slide in the dollar to erode the value of U.S. debts. And if lenders demanded higher interest rates to lend the U.S. government money, the rest of us would have to pay higher rates, too, for our mortgages and car loans and business loans.

The other effect, a fall in the value of the dollar, would also hurt regular folks, says Blinder.

Prof. BLINDER: Broadly speaking, the U.S. standard of living declines. Because the way we measure standards of living, conventionally, has to do with the purchasing power of the money you earn.

YDSTIE: Blinder and Reinhart agree the way to avoid a crisis is obvious: some combination of tax hikes and spending cuts. But politically, the solution is very difficult.

John Ydstie, NPR News, Washington.

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