Earlier this month the Greek government held a referendum on whether to accept the terms of a bailout given to the country by creditors in Europe and at the International Monetary Fund. Sixty-one percent of the Greek populace voted against the budget-cutting measures and other economic overhauls these creditors asked for in recent talks with the Greek government.
For more than five years now, Greece has been a source of financial and economic heartburn for global markets. The government in Athens has clearly overextended itself, running excessive budget deficits for decades and taking on large pension obligations for government workers.
What does a Greek default on its debt mean for our markets at home? Like it or not, Idaho businesses, consumers, and investors alike are affected by these markets on the other side of the globe.
The biggest risk is that Greece or its creditors will decide to no longer use the Euro currency. This may precipitate a fall in the value of the Euro and a corresponding rally in the value of the U.S. dollar. Further, in response to these currency changes, we are likely to see declines in both commodity and world stock prices.
In times of fiscal or debt crisis like these, global investors tend to move their capital into the U.S. dollar and the relative safety of U.S. government debt. The U.S. dollar currently buys about 1.11 euros, nearly 18 percent less than one year ago. Much of the increased demand for the dollar relative to the euro means higher demand for U.S. Treasuries, which in turn lowers the interest rates on these bonds.
Lower interest rates are positive for businesses trying to grow or consumers hoping to keep their home financing costs low. But excessive government debt levels and the declining value of the non-U.S. currencies mean economic growth around the world will be lower than expected.
The stronger value of the dollar also means dollar-denominated commodities are cheaper. Since the Greek crisis escalated at the end of June, the Reuters-Jefferies CRB index (an index that tracks a wide variety of commodities) has fallen nearly 10 percent. Oil and gold prices are also lower.
All this is bad news for Idaho when U.S. policy makers are pursuing export-led economic growth. President Obama recently received new authority from Congress to negotiate international trade deals. The United States Trade Representative Office estimates that more than 1,762 Idaho companies exported over $5 billion worth goods in 2014, supporting more than 26,000 jobs in our state.
Efforts to support and increase global trade are great as economic theory, and historical evidence shows that trade makes everyone better off. Many Idaho companies are seeking new markets for their goods, but slower economic growth and higher dollar-denominated prices for many products will counteract much of the benefits of any of new trade agreements.
Governments around the world have to get their budgets in order if prices are to stabilize and economic growth to pick up.
Unfortunately, the Greeks said Qxi.
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