Greece is in financial trouble and that is affecting economies the world over. The problem is that Greece’s National Debt simply grew too large. Due to government’s spending, the debt expanded 15% annually, but the economy itself was shrinking about 5% each year. As a result, the total government debt grew to 115% of the GDP and it is expected to grow to 150% by 2013. What that means is that the government owes more money than the whole country produces in a year. Believe it or not, the 115% number isn’t that much higher than many other industrialized countries. However, Greece has deep systemic problems. It was forced to cut back it’s spending and because it is a consumer based economy that produces almost no exports, there is little for the economy to do but shrink and make it’s debt burden greater.
In October, a new government shocked markets by announcing the current year’s deficit was more than four times the previous government’s estimate. There were also revelations that past governments had fudged statistics and that further eroded investors’ confidence. As a result, bond markets hammered Greek debt and refused to lend to Greece at an affordable rate. Greece was in danger of not being able to make it’s May debt payments.? Because Greece is part of the European Union, if Greece couldn’t make the payments, the EU was forced to jump in and help. Unfortunately, the EU was also struggling, and they could barely afford an expensive bailout. If the EU were to go into default, the repercussions would be felt worldwide.
How It Affects the U.S.
Fear helps the U.S. Bond Market – The US Economy, as shaky as we may view it, is considered the most stable economy in the world. In addition, US Treasury Bills, Bonds and Notes are considered the safest investment in the world. As a result, any time an event occurs that causes investors to worry about getting their money back, they will put their money in the safest investment possible, US Treasuries. The event could be a new worry about US Stocks, Asian Bonds, Europe’s economy, or anything else. This is called a, “flight to safety.” When this happens, US Treasury prices go up which moves the rates down. Those rates often go down so much, that investors want to make a little more money for their investment, so they buy US Mortgage Backed Securities, which aren’t 100% guaranteed by the US government, but pretty close. That investment lowers the mortgage rates that US lenders can offer.
How It Affects You
If you are in the market for a new home, then all this economic bad news may actually good news for you. All this fear is bringing mortgage rates down to record lows once again. Every bit of bad news is crumbling investors’ confidence and dropping rates. Just Friday, US employment numbers came out weaker than normal and the rates for mortgages fell once again. What direction rates will take in the future is anybody’s guess. Just remember the mortgage shopper’s golden rule, bad news for the economy is good news for you, and vice versa.