Riots may not have erupted in the streets over the uncertain state of America's finances, but Uncle Sam's balance sheets are under increasing scrutiny by credit rating agencies, debtors, and the American public, some of whom see worrisome parallels between our own debt crisis and the scenario playing out in Greece.
After all, if Greece's over-borrowing and mismanagement of public finances can send shock waves through the stock and bond markets, it's difficult to imagine how a full-blown debt crisis in the United States might impact the global financial system. "It's a path worth watching," says Mark Zandi, chief economist at Moody's Analytics. "It's the one the U.S. would ultimately go down if we don't make some policy changes."
To be sure, there are significant differences between Greece and the United States. Greece has long grappled with a ubiquitous underground economy and a dysfunctional tax system. By many standards, Greece's economy is inefficient and uncompetitive, crippled by the weight of a bloated public sector.
But there are similarities between the two debt-laden nations as well. Unchecked government spending in Greece has racked up a national debt bill amounting to more than 300 billion euros, or about 130 percent of GDP, according to an estimate from the International Monetary Fund. While the United States fares slightly better, currently shouldering about a 92 percent debt-to-GDP ratio, the Congressional Budget Office projects that level will reach 140 percent within two decades.
Despite those alarming numbers, experts say it's unlikely that the United States will face a crisis of Greece's magnitude, primarily because of the dollar's reserve currency status and the government's relatively untarnished record as a borrower.
"We have a history of dealing with our debt problems and we've not defaulted a lot—Greece has," says Diane Swonk, chief economist at Chicago-based financial services firm Mesirow Financial. "Also because of our reserve currency status, it's given us more leeway to carry more debt than a country that didn't have that kind of credibility."
That's not to say there won't be a price to pay if Congress drags its feet much longer formulating a plan to tackle the country's growing debt problem. Already, the U.S. government has found itself in the crosshairs of major credit ratings agencies warning that further delay in resolving the debt ceiling debate and addressing the soaring national debt could ultimately result in the government losing its prized AAA credit rating.
But a pristine credit rating isn't all that's at stake. The U.S. government's reputation as a credible borrower hangs in the balance as long as the saber rattling continues in Washington. While a technical default by the United States could be disastrous for global financial markets, experts say the markets are also spooked by the political uncertainty and weakness surrounding the state of U.S. finances.
"One way to look at the federal debt is as a financial product sold by the people of the United States," says James Angel, associate professor at Georgetown University's McDonough School of Business. "Think of it as a huge bank account—people from around the world can store their spending value in a safe haven like the United States. If we demonstrate to the rest of the world that we're a bunch of idiots and we can't manage our affairs prudently, it's certainly going to hurt the status of the U.S."
A loss of confidence among investors would likely translate into higher borrowing costs for the United States, because investors demand higher interest rates to compensate for higher perceived risk. That would ratchet up interest payments and divert more tax dollars to debt service.
For now, the United States retains its safe-haven status among bond investors, primarily because instability in other parts of the world has caused a "flight to safety." Nevertheless, experts stress that while the markets may be allowing Congress some leeway when it comes to the game of brinkmanship over the debt now, default by or a rating downgrade of the U.S. government could send the globe spiraling back into financial crisis.
"The bond market is a place where everything is OK until it's not," Zandi says. "One day, everything seems fine and then there's a catalyst, and that's what's going to happen here. If [a rating downgrade] were to happen, it would shake the entire global financial system. It would go right to the bedrock."
That's why experts are still optimistic that Congress can avoid the "nuclear option" of default and pull together a clear and comprehensive plan to raise the debt ceiling and ultimately reduce public debt. "It would be ideal if we had over the next year a 10- to 15-year plan that really started to put our fiscal house in order that was deliverable," Swonk says. "That is what bond markets would welcome more than anything. A real concrete plan that has triggers in it and has some teeth."