Could the U.S. Economy Ever Look Like Greece's?

The U.S. debt problem is not of European proportions just yet...but wait a few years.


This weekend, Greece's fiscal problems resulted in austerity measures and destructive riots in Athens. Meanwhile, the White House released a budget Monday making for a deficit of nearly $1 trillion. Looking at the Greek crisis and the United States' $15 trillion national debt burden, it's hard not to wonder: When, if ever, will the U.S. debt seriously threaten the economy?

[See pictures of Greek protests against austerity.]

For now, there is no threat of riots in the streets of Washington, but a few years of reckless spending could change that.

"At this point, I think we've got a path for a while," says Joel Naroff, president of Naroff Economic Advisors, an Pennsylvania-based economic consulting firm. "If we go another two or three years without making any progress on the deficit, then I think you'll start seeing interest rates begin to reflect real concern that the debt payment burden is getting to a level where sustainability is at risk."

The White House has attempted to tame deficits with its new budget—the fiscal year 2013 shortfall is down to $901 billion from 2012's $1.3 trillion. However, the toughest budgetary problems lie ahead, as an aging population will strain entitlement programs like Medicare and Social Security.

"While the deficit reduction approach outlined in the president's budget is a serious step forward, more is needed," said former Senate Budget Committee Chairman Pete Domenici and former White House Budget Director Alice Rivlin in a statement from the Bipartisan Policy Center, a Washington-based think tank. "While [Obama's] budget stabilizes debt over the next decade, the real problem arrives thereafter."

[See how the EU crisis could hurt the U.S. economy.]

The risk lies in borrowing costs—the interest rate that the U.S. pays on its debt. Currently, faith in the U.S.'s ability to pay back its creditors is seemingly high and unshakable, making for low interest rates on debt. Even when last summer's debt ceiling debacle resulted in a U.S. debt downgrade by rating agency Standard & Poor's, borrowing costs were remarkably low. The yield on 10-year treasuries remained around a paltry 2 percent and are currently just below that level. In contrast, that rate generally remained at 5 to 9 percent in the 1990s and 3 to 6 percent in the 2000s, prior to the latest recession.

With uncertainty reigning worldwide, the U.S. is still the least-risky place for investors. The country still is able to easily pay off the interest on its debt, says Naroff, and investors know it.

"If you want to park your money in anything safe, about the only place you can do that is the U.S. right now," he says.

[See Six Unusual Economic Indicators.]

The U.S. is not in Greek territory on this point—the interest rate on Greece's 10-year bond is at nearly 33 percent, reflecting little trust that the country can repay its debts in full. High borrowing costs could likewise push the U.S. debt level from merely worrying and into genuinely problematic territory.

Greece's debt is currently much larger than its economy, at over 160 percent of its GDP, according to IMF figures. The U.S. total debt, meanwhile, just surpassed the 100-percent mark last year. There's no telling what the magic number is that will scare off creditors. Forecasts of accelerating spending growth could raise fears,not to mention the cost of borrowing. The CBO estimates that interest costs will grow substantially, from 1.4 percent of GDP this year to 2.5 percent in 2022. And depending on what types of tax cuts or new spending Congress might pass, that could grow even more. In many ways, comparing the U.S. debt situation to that in Greece is an apples-to-oranges comparison. The United States is not in danger of default and also is not part of a monetary union, unlike Greece. But the larger challenges of balancing near-term economic crises with long-term spending targets are the same for any country.

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