Small Greek economy could make big waves in the U.S.

Could a collapse of the Greek economy, which is just a little larger than the economy of Washington state in terms of GDP, really push the U.S. into another recession?

Yes, according to many market watchers, including Arkansas-based economists Jeff Collins and Greg Kaza

The Greek economy had a 2011 GDP of $318.675 billion, placing it 37th among countries in terms of GDP, according to figures from the World Bank. By comparison, the U.S. GDP during 2011, was $14.582 trillion, or almost 46 times larger than that of Greece.

The Washington state GDP (estimate) during 2011 was $310.906 billion, according to the U.S. Bureau of Economic Analysis. Arkansas’ GDP was $91.496 billion during 2011.

Greek continues to struggle with government-debt, with newly elected political leaders there meeting to form a government to deal with the issues. Also in the mix is a growing problem with rising consumer and business debt levels in Spain held by the financial institutions there.

Economists at Morgan Stanley on June 15 cut U.S. GDP forecasts for 2012 and 2013 in part because of the intensification of the European debt crisis. The U.S. will expand 2% this year, down from a previous estimate of 2.3%, and 1.7% next year rather than 2%.

A GREECE ‘HAIRCUT’
Spanish 10-year bond yields on Monday (June 18) climbed above 7% for the first time since the creation of the euro amid fading optimism Greece’s election will calm the euro area crisis. More Spanish loans went unpaid in April, according to data published Monday by the Bank of Spain, suggesting the country’s recession is forcing more companies and consumers into default.

“Greece, though small, is part of the Eurozone, which means it is big enough to affect every interconnected link, including financial institutions in the United States,” said Kaza, executive director of the Arkansas Policy Foundation.

Part of the recent deal to broker Greece out of its government-debt issue included a “70% haircut for bondholders,” Kaza explained.

“Those bondholders include individuals and institutions, and they are not just in Europe, they are all over the world,” he said.

‘BODY BLOWS’
Collins, an economist with Springdale-based Streetsmart Data and the economist for The City Wire’s The Compass Report, said the failure of Greece to respond to its problems could trigger several other defaults in the Eurozone.

“There are about four or five European countries with significant debt issues,” Collins said. “But, yes, Greece is the canary in the coal mine. In and of itself, it’s not that big of a deal … but it could lead to that domino effect.”

With recent downward trends in the U.S. economy, to include lower GDP estimates, lower retail sales, consumer sentiment declines and a rising jobless rate, Collins said serious pullback in European economies will be felt across the Atlantic.

“The question is, ‘How many more body blows could the U.S. economy take before it’s pushed back into recession,’” Collins said.

EXPORT TROUBLE
U.S. exports to the 27-nation European Union dropped 4.8% in the year ended April, the worst 12-month performance since November 2009, Commerce Department figures show. By comparison, total U.S. exports were up 3% in April from the same time last year. The slump in Europe coincides with slowing growth in other major markets for U.S. goods, such as China and Brazil.

“The decline in Europe will weaken our exports over the long term,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York. “We look for the trade deficit to widen not only to the Eurozone but developing economies as well,” she said, consistent with their forecast that the U.S. economy will slow to just 1% growth by year-end from the 1.9% annual pace in the first quarter.

The decline in demand from Europe is just starting to show up in trade data because it typically takes three to six months for goods to be shipped after an order is placed, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington.

“The shoe is going to fall on U.S. exports to Europe,” said Hufbauer, a former U.S. Treasury official.

Exports have contributed 1.1 percentage points to growth on average since the third quarter of 2009, when the recovery began, accounting for almost half of the 2.4% average quarterly gains in gross domestic product, according to figures from the Commerce Department.

By comparison, sales to overseas buyers boosted GDP by an average 0.8 percentage point in the six-year expansion that ended in December 2007, as the economy grew at an average 2.7% annual pace.

Collins said much of what happens next will depend on whether Germany’s elected leaders are willing to do more to bail out Greece and Spain.

“Germany’s the biggest economy. They have to decide how much of a haircut they want to take, and what they get for it in return,” Collins said.