Can the Greek Crisis Happen Here?

Greek-ProtestChris Papagianis of E21 asks the question: Can the Greek crisis happen in the United States? Papagianis suggests that the problem lies not on the federal level, but at the state level:

Obviously, states – like the Eurozone members – don’t have their own individual currencies to devalue during a budget crisis. It’s also not simply whether California, Nevada, or Arizona’s deficit and gross debt compare with those of Greece, but how financial markets would deal with a state default and to what extent the political culture in these state capitols can be counted on to avert such an outcome.

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However the Greek situation is resolved, it is a reminder that financial panics are not just about specific debt-to-income ratios, but investor sentiment and the financial system’s ability to absorb a default. As more investors become aware of their exposure to the unthinkable, they take actions to hedge that risk. This leads to greater awareness of the risks, an erosion of confidence among counterparties, and the potential for the kind of “run on the bank” that ultimately did in Bear Stearns and Lehman Brothers.

Whole thing here. Niall Ferguson wrote about this prospect earlier this week in the Financial Times. Here’s an easy backgrounder on the Greek crisis.