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Greece is facing possible Default of its National Debt January 29, 2010

Posted by hslu in Economics, Politics.
Tags: , , , ,

Greece is facing possible debt Default

Greece’s national deficit is 12.7% of its GDP. The government has been rumored of facing default of its debt and there are talks of possible bailout from its European neighbors. Walls Street took note and dropped 1.1% yesterday. Greece adopted Euro in 2001 and European Union requires its member to hold its deficits below 3% of its GDP. If Greece defaults, there may be serious consequences and other countries in Europe such as Spain, Italy and Portugal may face the same fate.

Greece’s national debt is 113% of its GDP. United State’s debt is not too far from that level currently about 85% of its GDP. While interest rate is low, interest payment is not a problem; currently at 8% of its revenue. When, not if, interest rate starts to climb as economy recovers, interest payment will eat up a bigger chuck of United State’s revenue: income taxes (45%,) social security taxes (26.6%,) Medicare taxes (9.4%,) corporate taxes (12%,) license fees (3%) and other sources (4%.) (Source: Fiscal year 2008.)

The trend of mandatory spending is sure to go up as a percent of US GDP. As interest payment increases, discretionary spending will have to come down.

I can’t image what this graph will look like in 3 years if inflation comes back with a vengeance.



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