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May 16, 2011

Are the Greek and US debt problems reaching similar criticism and concern?


''ADDING TO THE MARKETS' disquiet is the ongoing Greek debt tragedy, which keeps getting worse.  The European Union raised its forecast Friday of Greece's 2011 budget deficit to 9.5% of gross domestic product from the previous estimate of 7.4%, as the economy has fared even worse than expected under austerity, which has meant higher taxes and spending cuts.  That also led to more civil unrest, including a general strike last week.

A Bloomberg poll of investors found 85% expected some sort of restructuring of Greece's debt.  That is reflected in market prices of Greek government bonds, with two-year note yields exceeding 25%, which indicates the market doesn't expect debts to be paid as promised on time.

Ironically, the flight to the safety of Treasury debt comes as the U.S. government is about to reach its legal debt ceiling Monday. The federal government can finagle its way for another couple of months, while the White House and Congress wrangle over spending cuts demanded by the Republican-controlled House of Representatives as a condition for raising the debt ceiling.

The debt-ceiling kabuki ritual will play out without the U.S. government defaulting.  Even if fiscal policy becomes less expansionary, the prospects for monetary policy seem to be the main drivers of the currency, commodity and Treasury markets. The Federal Reserve's QE2 -- the purchase of $600 billion of government notes -- is slated to wind down by the end of June.''

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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