aNewDomain.net — What would the Greek debt crisis look like if Greece was a U.S. State? Comparing a U.S. state’s debt to that of Greece is useful in understanding the sheer size of Greece’s dilemma and how it got into this mess in the first place.
Like Greece, U.S. states rely on someone else to issue the money they spend. Eurozone countries like Greece do not have their fiscal policies tied to their monetary policies. That’s essentially why other EU members like the United Kingdom and Sweden never joined the currency union.
Like a U.S. state, Greece isn’t allowed to issue its own money. So the problem would look identical in terms of Greece’s inability to solve the problem by devaluing its own currency.
Like a U.S. state, Greece can’t simply declare bankruptcy and reorganize payment of its debts. States are excluded from the U.S. bankruptcy law, and Article I, Section 10 of the U.S. Constitution also prohibits state bankruptcy. Countries have no supranational authority to supervise sovereign defaults (the term for a nation’s bankruptcy), although organizations like the International Monetary Fund can provide assistance.
But unlike any U.S. state’s current debt level, the scale of Greece’s debt is massively different in terms of the ratio of debt to gross domestic product (GDP). Why? Because Greece owes tremendously more than any U.S. state. To put it in perspective, Greece owes its creditors about $300B euros. That’s 175% of Greece’s GDP. That means that the Greek debt has expanded beyond the level of the Greek economy to pay for regular government programs plus interest payments on the debt. Something has to give, and whatever gives may further harm the country’s ability to satisfy its debts.
Greek Debt Compared with Puerto Rico’s Debt Crisis
Puerto Rico also has a debt crisis. It is looking for a solution that might even involve bankruptcy. But Puerto Rico’s gross indebtedness is a tiny fraction of the debt that threatens Greece right now.
Puerto Rico, by the way, owes its creditors $72 billion. And its GDP is about $103 billion a year. Puerto Rico’s debt is smaller in absolute numbers than Greece’s debt, and it’s not even 70 percent of the Puerto Rican GDP. Of course, Puerto Rico is a commonwealth and not a state, which somewhat hampers a solution to its debt crisis since it needs to work more closely with the U.S. federal government in solving its problems than a state.
Governmental indebtedness is difficult to measure for many reasons. Among other things, a hefty portion of governmental indebtedness involves unfunded or underfunded liabilities — take, for example, the pensions promised to police officers. By the time the debt becomes due, the situation is likely to have changed in some way that alters the amount of money owed, either up or down.
Greek Debt Compared with New York’s Debt
But let’s look at New York, which actually owes more money than Greece does.
In terms of both size and percentage of GDP, New York has one of the highest debts among U.S. states, both in size and percentage of GDP. New York’s combined state and local indebtedness has been estimated at about $360B. In Euros, at today’s exchange rate, that’s 328B euros. But while New York owes more than Greece, its debt is just 25 percent of the overall New York GDP.
So how large would New York’s debt need to be to equal Greece’s debt?
For New York’s debt to be an equal percentage of GDP to that of Greece’s indebtedness, the Empire State would need to borrow about $4.2 trillion dollars — about 10 times the amount of money that it presently owes.
Return to The Drachma
If Greece had its own currency — say, the drachma, as it used to have — then the currency markets would have somewhat taken care of the debt problem through steady devaluation.
The currency devaluation would make Greek products and services cheaper and likely stimulate the Greek economy. Greeks would have to pay more for foreign goods, but so be it.
However, Greece doesn’t have its own currency. And Greece amounts to just two percent of the GDP of the Eurozone countries. Unlike, say Germany, the Greek economy has limited ability to impact the value of the euro either up or down.
Greece’s creditors obviously have an interest in changing the terms of Greece’s loans to help the country avoid default.
On the other hand, Greece’s creditors are also Eurozone countries themselves, and they’ve previously helped Greece when the debt crisis started several years ago.
Germany has loaned Greece more money than any other country and is hesitant to loan Greece more. Germany is particularly insistent that the Greeks make further reforms to better ensure their future financial stability. Some of the small Eurozone countries like Latvia had to make sacrifices in order to join the Eurozone and are hesitant to give Greece too much slack.
In addition, several other larger Eurozone countries also have debt problems, and they are likely to ask for refinancing of their own loans on similar terms to whatever terms are provided to Greece.
A solution to the crisis seems elusive at the moment, and until divergent political interests converge, the crisis will likely continue. The country is already in default, though its creditors are still willing to work with the country to devise a rescue plan.
Still, Grexit looms. That isn’t in the interests of Greece’s primary creditors because they are also other Eurozone countries. But cutting them a good deal isn’t in the interest of creditor countries either.
In essence, that’s the dark knot that so far has thwarted a solution to the problem.
For aNewDomain, I’m Tom Ewing.