Obama can offer little in talks on Greek debt crisis

Greece's debt crisis may lead to slower US growth, a rising dollar and turmoil in credit markets that may make it more difficult for cash-strapped states such as California to borrow.

And as President Barack Obama meets today with Greek Prime Minister George Papandreou, there's little the US can do.

There will be "a slower recovery in terms of job creation and these Greek-type issues don't help," said Simon Johnson, a former chief economist at the International Monetary Fund. Because Greece is in the European Union, he said, "the action items are not so clear for the US."

Johnson said that whatever the outcome of a possible EU bailout of Greece or whether the debt crisis spreads to other countries, the turmoil could cloud the US economic and fiscal picture. This would create additional challenges for Obama as he struggles with a recovering economy, high unemployment and a federal budget deficit that the Congressional Budget Office said would total $US9.76 trillion over the next 10 years.

In a speech at the Washington-based Brookings Institution yesterday, Papandreou said the Greek crisis posed a financial risk to the US.

'Trade Deficit'

"For America, a weak euro means a rising dollar; that, in turn, means a rising US trade deficit," he said. If the EU, the US's biggest trading partner, "should falter, the consequences here would be palpable."

Obama has been receiving briefings on Greece as part of his daily economic update. Publicly, administration officials have limited their comments to expressing confidence European governments will handle the crisis.

"The European Union can and will act appropriately to ensure an effective response," White House press secretary Robert Gibbs told reporters Feb. 26.

Papandreou began a three-day visit to Washington after meeting with French and German leaders. The crisis will be an "important part" of the discussions with Obama, White House deputy press secretary Bill Burton said yesterday.

After a meeting with Papandreou yesterday, Secretary of State Hillary Clinton said he didn't ask for financial help. The Greek leader also will consult with congressional leaders and Treasury Secretary Timothy F. Geithner.

'Global Financial Crisis'

Papandreou said yesterday that if the turmoil in Greece "metastasises" it "could create a new global financial crisis with implications as grave as the US-originated crisis two years ago." He urged the US and Europe to combat "unprincipled speculators," who Papandreou and other European leaders such as French President Nicolas Sarkozy have blamed for much of the surge in Greek financing costs.

German Chancellor Angela Merkel today called for urgent regulation of credit-default swaps to shore up the euro area and prevent a rerun of the Greek financial crisis.

Merkel said new regulations are needed because of "ongoing speculation against euro-region countries."

Greek officials have been working to reduce the nation's budget deficit of 12.7 per cent of gross domestic product, the largest in Europe, while they lobby the EU for an aid package. Investors had been growing less skittish after Greece sold 5 billion euros ($US6.8 billion) of bonds last week and passed 4.8 billion euros of spending cuts, reducing the risk of default.

Falling Euro

The euro is down almost 5 per cent this year against the dollar partly because of a concern a Greek default would destabilise the 16-nation monetary union. Billionaire investor George Soros said Feb. 28 the currency "may not survive" the crisis.

The euro pared early gains yesterday after Papandreou's comments, and today dropped 0.3 per cent to $US1.3587.

Obama must not be perceived as interfering in a European matter, said Sebastian Mallaby, head of the Geoeconomics Center at the Council on Foreign Relations in Washington. EU leaders are backing the creation of a lender of last resort that could come to the aid of a struggling member-state.

"It is an EU/Greece problem," Mallaby said. US involvement is "just not in the cards."

Slower Growth

Economies in the euro region grew 0.1 per cent in the fourth quarter of 2009 and steps taken to stem the fiscal crisis may lead to slower growth there.

That, in turn, may act as a drag on the US economy and impede Obama's efforts to bring down the unemployment rate, which was 9.7 per cent in February, after rising above 10 per cent in the final three months of 2009.

There are also risks if the financial problems in Greece and other European countries cause bank losses that lead to reductions in lending.

Obama has urged US banks to increase lending. Johnson, a fellow at the Peterson Institute for International Economics in Washington, said those banks may cut back if they are worried about the need to build capital to respond to a debt crisis.

Catherine Mann, a former Federal Reserve economist now at Brandeis University in Waltham, Massachusetts, said the Greek crisis also could hinder the efforts by California, the largest state borrower, to solve its debt problems. California has the lowest credit rating of any U.S. state, and could face new difficulties borrowing money if lenders grow more risk averse.

The crisis is being used by Republicans to criticise Obama's handling of the deficit.

"We need look no further than the crisis that's unfolding in Greece," Indiana Representative Mike Pence, chairman of the House Republican Conference, said March 3. "By the year 2030, America will be Greece."

Bloomberg