Eurozone crisis spans oceans - concern in debt-laden US (Feature)

By Chris Cermak May 4, 2010, 4:08 GMT

Washington - A burning question has been asked since the start of the year: Could Greece's debt woes stretch beyond the eurozone's shores?

The possibility of a debt default by Greece's government has already plunged the 16-member eurozone into the worst crisis since its founding, prompting fears that countries like Spain, Portugal and Ireland could follow suit.

The United States has been watching the crisis from afar, though stock markets have moved up and down over the last few months along with hopes of a rescue package by the European Union.

President Barack Obama's administration has become increasingly involved. As Germany balked at the prospect of a Greek bail-out, Obama last week spoke by telephone with German Chancellor Angela Merkel about 'the need for resolute action.'

Aside from the market roller-coaster, the effects of the Greek crisis on the United States have yet to be dramatic. The dollar has risen about 8 per cent against the euro since the start of the year as many investors fled to the long-held security of US government bonds.

But alarm bells have been ringing louder throughout the year. With public debt coming under increasing scrutiny around the globe, investors and economists have been debating openly whether long-term US Treasury bonds are still the safest place to put their money.

The United States, the world's largest economy, is likely to run a federal budget deficit of nearly 11 per cent of economic output this year, almost as high as the nearly 14-per-cent deficit that caused Greece's borrowing costs to skyrocket.

'A Greek crisis is coming to America,' financial historian Niall Ferguson warned in the Financial Times in February. 'US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.'

Other economists argue that fears that the US is in similar dire straits are deeply exaggerated. For one, they point out that the US economy is growing again - 3.2 per cent in the first three months of this year - while Greece remains locked in recession.

Yet the United States remains in its own quandary. With unemployment at 9.7 per cent, Obama is under pressure to adopt more well-aimed public spending measures to encourage new hiring.

At the same time, the International Monetary Fund (IMF) warned last month that the US still needed its own 'credible plan' for cutting debt in the medium term, or risk rising borrowing costs over the coming years on its own debt.

Aside from the budget concerns, there are other reasons the United States should be taking greater notice of the eurozone's woes.

Simon Johnson, a former chief economist of the IMF, noted that US banks are heavily invested in European bonds. The United States must help guarantee the financial system does not fall into a second crisis - this time because of government debt instead of excessive risks taken by banks.

'We again find ourselves approaching the point when the financial sector will scream, 'Rescue us or face global economic collapse',' Johnson wrote on his blog baselinescenario.com. 'The idea that we can leave this to the Europeans to sort out is an idea of yesterday.'