Almost 18 months ago, I warned of a coming debt crisis in Greece. At that point, Greek debt yields reached 14 percent--meaning that Greece had to pay a lot of extra interest to entice investors to purchase its debt. As a comparison, the US two year debt now yields 0.19.
Well, today yields on Greek debt really blew out--one year Greek bonds now yield 68 percent, and the two year is nearing 50 percent--quadrupling over the last year, as shown at right. These yields reflect the fact that the market now assumes the risk of some form of default on Greek sovereign debt.
While Greek adoption of the IMF's and Eurozone's austerity prescription averted a financial cataclysm in 2010, it backfired in 2011, causing a deeper recession, a widening Greek deficit and therefore a worsening not an improvement of the Greek debt crisis. The GOP Arson Squad should take note: the Greek experiment shows that austerity will only worsen a recession induced deficit. The only way to resolve a debt crisis is rapid growth in productive government investment, as I have argued since December of 2008. It is becoming increasingly unclear whether Greece will see further bail outs from the Eurozone.
The failure of austerity in Greece, seems destined to wreck havoc across global financial markets and exacerbate the US stagnation/recession, as well as threaten a wider conflagration in Italy and Spain. Indeed, combined with other issues threatening US bank capital, these Eurozone issues caused credit default swaps to increase yet again for the US financial sector evincing enhanced risk aversion here in the US.
The situation in Greece suggests a grimmer outlook for the global economy which necessarily means a grimmer outlook for the US.