Downgrading of Greek debt puts strain on EU

Debt issued by Greece has been downgraded by credit ratings agency, Fitch.  This means that debt issued by the country is more risky.  In response to the credit downgrade many holders of Greek debt sold their interests, meaning that yields increased.  This also means that any future debt issued by Greece will be at the new higher rates, straining the government’s ability to maintain its solvency.

As I have reported on the blog, the problems with Greece’s debt are likely to lead to diminished unity for the EU.  In particular, Germany, who has been called upon for decades to be the EU’s economic backstop, has said that it will not be aiding Greece unless the IMF has turned down the country.  This demonstration of sovereignty by Germany was a signal to the entire EU that it is breaking ranks with the Union for the first time since World War II and forging a new and unique foreign policy.  Germany’s choice is also a signal to the other EU players that it is no longer the lender of last resort.  In particular, Italy, Portugal and Spain are in “too much debt” trouble.  Right behind those nations are major players, the UK and France.

If the EU is not unified in bust times, and only in boom times, then its members will start to question the raison d’etre of the Union.  Meanwhile, the U.S. is the indirect beneficiary of a weakened EU.  If there are any debt problems that bankrupt nations in Europe, the Euro will sell off leading to an appreciation of the $ dollar.  It also will likely lead to a “flight to quality” as holders of European debt sell their interests and purchase U.S. dollar denominated debt.  That increased demand for U.S. debt will drive down the lending costs for U.S. businesses and consumers – a very good thing.

I will continue to monitor this situation closely, but right now it looks like the generations old European construct against U.S. hegemony, the EU, is wobbling.  Only time will tell if it collapses.

Jason