Opinion: Why Greece Matters to Us

(April 30) -- Greece, obviously, is a small economy. Its annual output is about 2 percent of that of the eurozone, and in turn that might make it about one-half of 1 percent of world output, or very roughly so. Its government indebtedness would barely be a rounding error compared with the mountain of U.S. Treasury debt.

So when its government bonds were downgraded to junk status -- meaning the likelihood of full repayment of principal and interest is questionable -- it might seem like a small matter. What does Athens, Greece, after all, have to do with Athens, Ga.?

That all depends. If the more powerful members of the eurozone (16 countries mostly in western Europe - minus the U.K. and Switzerland) jump in and guarantee Greece's debt, probably there will be no consequence at all. The resources of France and Germany in particular are so large that a bailout would be a small matter for them, would be of huge help to Greece and would calm world market fears.

But there are some circumstances in which Greece could matter to us here.

For one, if the hedge funds and speculators have made immense bets on the Greek bonds that turn out to require some major banks to pony up the winnings to the negative bettors, and if the losing side lacks the collateral to pay off, we could have a major banking crisis -- again.

Let's hope and pray that does not happen. Lehman Brothers was bad enough.

The second way this might be a problem is if other nations turn out to also have the same kinds of solvency problems Greece has. Greece has been spending too much on social services relative to its tax collections for many years now. It has been joined in that unhappy situation by Spain, Portugal, Ireland and Italy. If all of these nations, which collectively might have very roughly 25 percent of the eurozone product, turn out to have solvency problems, a major-league bailout would be needed to rescue them.

There is real question whether the International Monetary Fund, a sort of last-ditch rescue entity for governments, has the resources to do that. Of course, it can find the resources because it has almost unlimited quasi-money creation powers, but using them might trigger great anxiety in world markets.

If there is a default by a country the size of Spain or Italy, that would mark a convulsion of serious and upsetting size. It would rattle U.S. markets along with all other markets.

But other large nations have gone into default before, especially Russia, and the world survived, and the world would survive losses by holders of Italian or Spanish or Irish debt. It would be uncomfortable, but we would get by.

The real gorilla in the room is more basic. The two main English-speaking nations -- the U.K. and the U.S. -- have gigantic debt problems too. We also have been living far beyond our means for years. This began in a big way with the administration of George W. Bush and has ratcheted up like a hockey stick under Barack Obama.

To be sure, the U.S. is an immense economy, by far the largest in the world. But our debt is also enormous. And at some point, our debt will be so big that it will simply not be possible to pay it off in a credible way, even over a virtually eternal period of years.

At that point -- and we are getting there rapidly -- U.S. debt (and U.K. debt) may also be marked as junk. This will likely result in staggeringly large upward movements in U.S. interest rates. That would dramatically affect every home buyer, every business borrower, every user of a credit card. The effects would be extremely serious.

Long ago, Thomas Jefferson realized the violent differences between North and South on the issue of slavery and how the possibility of conflict hit him "like a fire bell in the night." Greece -- and Spain, Portugal and Italy -- are our financial fire bells in the night. If it could happen in Athens or Madrid or Rome -- and it might or might not -- it can happen in London and New York and Washington, D.C.

There are ways out -- the Fed can buy all of the debt we can issue -- but that leads to inflation. And the crisis could be very long delayed.

But there are reasons why Greece matters.

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By the way, a little side note. The Germans are reportedly asking why the heck they should bail out Greece. I gave some reasons above, but here is another one. In 1941, with zero provocation, the Germans invaded Greece, bombing it mercilessly and conquering it, although Greece put up a fantastically brave fight. The Germans then occupied the country brutally for about 40 months. Maybe someone in Germany, rebuilt with aid from the U.S. taxpayers, might think some make-good is owed to the Greeks and to the people of Europe and the West generally. Just a thought.

Ben Stein is an economist, lawyer, actor, comedian, public speaker and university teacher, and he was a speechwriter for Presidents Richard Nixon and Gerald Ford. He has also written several books, the latest of which is "The Little Book of Bulletproof Investing," written with Phil DeMuth.

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