By Kevin Fagan, Asst. News Editor -

Greece may be the land of pleasant weather and the healthy Mediterranean diet, but concerns about the magnitude of Greek debt are affecting both U.S. and European equities markets and causing concerns about the recovery from the recession. Even though Greece represents just 2 percent of the European economy, Greece affects all of Europe because it uses the Euro, an international currency controlled by the European Central Bank in Germany.

Why does this affect the United States? Any perceived increase in the instability of an economy will cause a flight to U.S. treasuries because of fear, and a flight away from the stock market. These same fears are also stoking the opinion that the United States will be going through a “double-dip” recession, where the economy deteriorates significantly after recovering slightly. This would further raise the unemployment rate, which is currently at 9.7 percent, and cause the United States to have similar problems as a result of the public debt.

Timothy Geithner, Secretary of the Treasury, said last weekend that European officials are carefully evaluating and handling the economic situation. Fortunately for Geithner and U.S. officials, Europeans have incentives to cre¬ate a solution, though sellers were disappointed after the weekend on Feb. 8 as the Dow Jones Industrial Average dropped below 10,000 for the first time in three months. The current budget deficit in Greece is 12.7 percent of gross domestic product (GDP), though European Central Bank President Jean-Claude Trichet added that he is confident that Greece will cut its deficit below the limit of 3 percent of GDP. This will optimistically occur through both an expansion in GDP as the recovery progresses and through cuts in government spending, provided that these cuts do not negatively affect the Greek economy.

“Greece has two ways out of the crisis: subsidies from other members of the Eurozone such as Germany and France, or Greek changes in policy, with increased taxes and public sector cuts,” Professory Philip Strahan, the John L. Collins Chair in Finance at CSO, said.

Realistically, Strahan suggested that the solution will most likely be a combination of the two, with aid from the Eurozone coming with mandates to balance the deficit, though differences in culture between Germany, France, and Greece make the negotiations more uncertain than if a state like California were to ask for aid in balancing its budget. Ireland, Portugal, and Spain are experiencing similar problems, so providing aid to Greece could be a slippery slope for the stronger members of the European Union.

On a more technical note, Greek credit default swaps, a mechanism used by holders of debt to eliminate the risk of default have risen to 426 basis points. This means that it takes $426,000 per year to insure against default on $10 million of Greek five-year bonds, for a total of over $1 million during the five-year period. This compares to 16.5 for U.S. government credit default swaps during the early part of the crisis. One difference between these metrics and insurance is that holders of the credit default swaps do not actually have to own debt; they may buy the swap and then trade it in a secondary market to make a profit. This means that the market for these swaps may be inflated as a result of the increased activity from speculation and not the fundamentals.

In the short-term, this crisis appears to be only affecting the equities markets and the market for U.S. treasuries, with little affect on the macro-economy or on the job market, though a significant deterioration in the situation could have a huge affect on the global economy.