Friday, March 26, 2010

Is European Debt Greek To You?

The press has been covering various countries and their possibilities of defaulting on their debt for some time. Last year, Iceland had a financial crisis that caused many to become quite nervous that it could cause a series of defaults across Europe.

Lately, the big target has been Greece. For quite some time, the burgeoning levels of greek debt have made many investors nervous. A country, like a company or a person, can spend more than they have, but must borrow in order to do so. Companies can borrow by issuing stock or bonds. Countries can borrow by issuing bonds or other similar securities. All are forms of IOUs.

In the case of Greece, the increased debt levels have made people nervous because they seem to be at a level that could never be repaid. This fear was lessened to some extent today with a new agreement that provides some backing for Greek debt. Read Bloomberg's Greek European Union Accord article to learn more.

What does this all mean for the average personal finance enthusiast? In reality, there is not much we can do about the government spending in other countries. However, we CAN and should hold our own government accountable to the tremendous spending that we're undertaking as a nation. At last count United States Debt was at an astonishing 41,000 dollars USD per citizen. This is not sustainable and the amount of interest paid daily on that debt is staggering. Over 6,100 dollars US is just the interest on that debt.

In simple terms, we can view the United States as a company. And we're competing with European, Asian, and Latin American countries to produce goods and services and get the best price for them. However, we're not doing well if we have a huge debt burden because it leaves us over a proverbial barrel when it comes to spending on real needs down the road. That is what has caused Greece to need this bailout. Unfortunately, the US is too big for anyone to bail us out. Even China, a large consumer of the US debt, is starting to buckle under the weight of its dollar reserves.

I hope this was an interesting post for you; I know that it had been a long time since I'd thought about the crisis in Iceland and this has certainly motivated me to become more aware of the political landscape in advance of the November elections!

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