Greek Debt Crisis and the U.S.

6
May

Greek Debt Crisis and the U.S.

Econoclast Comment

Is there substantial counterparty risk to U.S. financial entities from the Greece issue via European banks? If not, and it doesn’t appear that there is, then U.S. equities should rebound once the major portion of this speed bump is past.

Implications for the U.S.

By MIKE COSGROVE – Econoclast

Had the Greek issue surfaced in late 2008 or in the first part of 2009 it would have been different. Other countries such as Portugal and Spain are also being impacted but the effects on U.S. real growth should be minor unless, as indicated, some U.S. financial entity has significant financial exposure.

The U.S. economic expansion will soon be one-year old and the Greece issue has the effect of increasing the value of the dollar compared to the euro and delaying possible inflation concerns in the U.S. Result — lower bond yields than otherwise would be the case.

Three Implications

1. The global multi-year growth trend remains intact.

2. European issues delay when the Federal Reserve starts its move toward a neutral federal funds rate. A neutral federal funds rate is 4% when inflation is 2%. The federal funds rate, currently, is near zero. If this Greece issue has staying power, it probably means the Fed stays where it is through 2010.

3. The $1.1 trillion of excess reserves is going to remain in the banking system longer. That plus a zero federal funds rate is positive for a substantial move higher in U.S. equities later this year.

It would not be surprising to see the Bernanke Fed revert to the Greenspan rule as the Fed moves toward a neutral federal funds rate. That means the Fed waits for a signal from bond buyers before the Fed moves the funds rate higher.

Ten-year Treasury yields may need to climb over 4% in order to provide a signal to the Fed that it is time to start moving the federal funds rate higher.

And as indicated many times U.S. fiscal policy — tax, regulatory and spending activities – are, on balance, unfriendly to business formation, job growth, equity prices and bond yields.

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Mike Cosgrove, principal at Econoclast, a Dallas-based capital markets firm, is a professor at the University of Dallas.