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Kicking the Can on Greece Could Be Best Deal for U.S. Economy Kicking the Can on Greece Could Be Best Deal for U.S. Economy Kicking the Can on Greece Could Be Best Deal for U.S. Economy Kicking the Can on Greece...

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Economy / Analysis

Kicking the Can on Greece Could Be Best Deal for U.S. Economy

Luxembourg's Prime Minister Jean-Claude Juncker rubs his face during a media conference after a meeting Tuesday of eurozone finance ministers at the EU Council building in Brussels.(AP Photo/Virginia Mayo)

Kicking the can down the road isn’t always a bad thing. When it comes to the Greek bailout agreement reached on Tuesday, it’s actually a very good thing for the United States. Tuesday’s deal buys the U.S. and its eurozone counterparts time to prepare for eventual worst-case scenarios while giving the fledgling U.S. recovery space to find its footing in the meantime.

The agreement left long-term questions about the fate of Greece unanswered. It will require further austerity in an already fiscally ailing country, which some fear will doom growth and only make the situation worse. It is unclear whether the country can successfully implement the reforms, or whether its debt-to-GDP ratio can be brought down to a sustainable level quickly.

But for investors worried about a potential European shock to the American economy, those unresolved issues can be translated into an extended period of at least relative calm that might allow consumers’ and businesses’ confidence to firm up enough to support U.S. growth.

 

“They clearly are still pushing the problem a little bit down the road,” said Nigel Gault, chief U.S. economist at IHS Global Insight. “But... that is good for the U.S.”

Confidence has been one of the main avenues through which the European sovereign debt crisis has affected the U.S. economy. The United States has very little direct exposure to Greek debt. Instead, if Greece defaults on its debt, borrowing costs for risky Spanish, Portuguese, Irish, and Italian debts could rise and spread to France and other European countries that hold them -- countries whose fiscal positions have a much greater direct effect on the United States. The continent could slip into a depression or deep recession, causing a credit freeze and hitting the U.S. export market, slowing the U.S. economy. American business and investor confidence would also take a hit, slowing spending and hiring, and causing the fragile U.S. recovery to take a giant step backwards. And indeed, it did take a hit last year when the European crisis escalated.

But Michelle Meyer, a U.S. economist at Bank of America Merrill Lynch, said that investors have been less focused on what’s happening overseas in 2012 than they were in 2011, when Europe worries caused markets to see-saw for months.

That’s in part because the data in the U.S. points to a strengthening in the recovery despite the blow to confidence the European situation dealt last year. Indeed, while the Federal Reserve noted at its most recent meeting that investors were still watching the situation overseas for signs of emerging long-term solutions, “market sentiment toward Europe appeared to brighten a bit.”

So Tuesday’s deal, which would provide a $172.1 billion bailout for Greece, elicited a muted response from the markets. Although the Dow initially climbed over 13,000 for the first time in nearly four years on the news, it later fell below that level and closed just 15 points up.

“The market is of the view that for now, anyway, the proverbial can has been kicked down the road again,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. Investors, he said, are waiting to see how the next injection of liquidity from the European Central Bank plays out, as well as the results of the Greek and French elections this spring.

The subdued reaction could also reflect knowledge that problems in Europe would need to seriously escalate, involving something like a disorderly default in Greece, to have any near-term effect on the United States, said Meyer. Without the latest bailout deal, Greece would default on March 20, when a $19.2 billion bond payment came due. Now, that’s not going to happen. 

But serious fallout from a Greek default or exit from the eurozone down the line remain all-too-real possibilities. The question is whether the U.S. and Europe will be adequately prepared. Today, at least, they can breathe easy.

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